Suppose your bank lowers its minimum balance requirement by $500.So you take $500 out of your checking account and put it into a money market deposit account.What is the overall effect on M1 and M2?

Question

Quizplus · Accepted Answer

M1 is defined as the sum of currency in circulation, checking account deposits, and traveler's checks. When $500 is transferred from a checking account to a money market deposit account, M1 falls by $500 because the checking account deposit decreases by $500. However, M2 includes M1 plus savings account deposits, small-time deposits, and money market mutual funds. Since the $500 transfer is going into a money market deposit account, which is part of M2, it does not have an effect on the M2 measurement. Thus, the overall effect is that M1 falls by $500, while M2 is unchanged.

Suppose Your Bank Lowers Its Minimum Balance Requirement by $500