During the period following 1995,many individuals shifted funds from interest-earning checking accounts to money market deposit accounts.How did these shifts impact the M1 and M2 money supply figures?
A)They reduced the growth rate of M1 but exerted little impact on M2.
B)They reduced the growth rate of M2 but exerted little impact on M1.
C)They reduced the growth rate of both M1 and M2.
D)They did not affect the growth rate of either M1 or M2.

Question

Quizplus · Accepted Answer

The shift of funds from interest-earning checking accounts (which are included in M1) to money market deposit accounts (which are included in M2) would reduce the growth rate of M1 because there would be fewer deposits in interest-earning checking accounts. However, the impact on M2 would be small because the increase in money market deposit accounts would be partially offset by a decrease in savings deposits, which are also included in M2. Therefore, the correct choice is A, where the shift in funds reduces the growth rate of M1 but exerts little impact on M2.

During the Period Following 1995,many Individuals Shifted Funds from Interest-Earning