If banks move a substantial portion of depositors' money from interest-earning checking accounts into money-market deposit accounts, how will the money supply measures be affected?
A)M1 will become smaller, and M2 will become larger.
B)Both M1 and M2 will increase in size.
C)Both M1 and M2 will decrease in size.
D)The size of M1 will be reduced, but M2 will be unchanged.

Question

Quizplus · Accepted Answer

M1 includes currency and checking accounts, so moving money from checking accounts to money-market deposit accounts reduces M1. M2 includes M1 plus savings accounts and money-market accounts, so M2 remains unchanged as the money is still within M2.

If Banks Move a Substantial Portion of Depositors' Money from Interest-Earning