Question

Fred Jones withdraws $1,000$1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1M1 and M2M2 ?

Answer 1

The withdrawal of $1,000 in cash will lead to increase in the money supply, which results in increase in M1 money and decrease in M2 money.

What is M1 and M2 money in economics?

The M1 includes money in circulation and checkable bank deposits. The M2 includes a M1 savings deposit (under $ 100,000) as well as money market funds.

The immediate effect this transaction have on the monetary aggregate measures of M1M1 and M2M2 is that there will be increase in money supply in the economy which will increase the M1 money.

On the other hand, it will decrease the money in the savings accounts. leading to reduction of M2 money by the same amount.

Thus,The withdrawal of $1,000 in cash will lead to increase in the money supply, which results in increase in M1 money and decrease in M2 money.

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