Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500.You take $500 out of your passbook savings account and put it in your checking account.What is the overall effect on M1 and M2?
A)M1 rises by $500, M2 falls by $500.
B)M1 is unchanged, M2 is unchanged.
C)M1 rises by $500, M2 is unchanged.
D)M1 is unchanged, M2 falls by $500.

Question

Quizplus · Accepted Answer

M1 includes all currency in circulation (coins and notes), traveler's checks, demand deposits, and other checkable deposits. When $500 is moved from passbook savings to checking accounts, M1 increases by $500 because demand deposits increase by $500. However, there is no change in M2, which includes M1 plus savings deposits, time deposits of less than $100,000, and balances in retail money market mutual funds. The reason is that savings deposits fall by $500, which offsets the increase in M1.

Suppose Your Bank Raises Its Minimum-Balance Requirement for Free Checking