Suppose your bank lowers its minimum-balance requirement on personal chequing accounts by $500. You take $500 out of your personal chequing account and put it in the money market mutual fund account. What is the overall effect on M1 and M2?

Question

Quizplus · Accepted Answer

Lowering the minimum-balance requirement on personal chequing accounts by $500 would mean that individuals would have more flexibility with their funds and may choose to move some of their money to a money market mutual fund account. By removing $500 from the personal chequing account and placing it in the money market mutual fund account, M1 would decrease by $500 since there is a decrease in demand deposits. However, M2 would remain unchanged since the funds are still within the financial system and could be converted back into demand deposits at any time.

Suppose Your Bank Lowers Its Minimum-Balance Requirement on Personal Chequing