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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.
Business Economics Monetary Policy

Answer

Step #1 of 2

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.

 

 

Step #2 of 2

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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