Question

If a person moves $1,000 from a small-denomination time deposit to a demand deposit account, Select one: M1 increases an...


Transcribed: If a person moves $1,000 from a small-denomination time deposit to a demand deposit account, Select one: O Ml increases and M2 decreases. M1 decreases and M2 stays the same. M1 stays the same and M2 increases. O Ml increases and M2 stays the same.

Answer

M1 is the most liquid money supply. It includes, cash, demand deposits and other deposits.

M2 is less liquid than M1. It includes M1, time deposits, money market funds.

 

When $1000 was in time deposits, it was a part of M2 but not M1.

When this moved to demand deposits, it became a part of M1.Since M1 is a part of  M2, this $1000 is still a part  of M2.

So, M1 increases and M2 stays the same.

 

 

Option A: Incorrect

M2 cannot decrease as $1000 is still a part of M2 as M1 is a part of M2.

 

Option B: Incorrect

$1000 is being added in M1, so M1 should increase.

 

Option C: Incorrect

M1 cannot stay same as demand deposits are a part of M1.

 

Correct Option : Option D

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