Question

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will _____ and M2 will _____.

Answer 1

Answer: Increases; remains unchanged

Explanation:

Given that,

A person withdraws from saving account =  $500

M1 consists of:

M1 = Currency with public + checking account + other deposits with RBI

M2 consists of:

M2 = M1 + post office savings account deposits

A person withdraws from his savings account, as a result M2 will fall and then put this amount in his checking account which increases M1. We know that M1 is a component of M2, hence, M2 also increases.

Therefore, there will be no change occur in M2 and M1 increases.