Question

For each of the following think about whether the portion of assets the person has in both M1 and M2 is going up, down, or staying the same. Provide a brief explanation (i.e. for each part you should state what happens to M1 and what happens to M2).

a) Jane withdraws funds from her checking account and deposits them into a money market mutual fund.

b) Jamie withdraws funds from her checking account and uses them to buy shares of stock.

c) Justine sells some rare Pokemon cards and deposits the proceeds into her checking account.

d) Jessica takes some cash from her pocket and deposits it into her saving account.

Answer 1

M1 is physical money and can be converted to cash easily

Cash

Coins

Demand deposits

Travellers checks

Checking accounts

M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. M2 can be converted to M1 fairly easily.

a) Jane withdraws funds from her checking account and deposits them into a money market mutual fund.

M1 goes down, M2 goes up. Money market funds is near money and, therefore, M2

b) Jamie withdraws funds from her checking account and uses them to buy shares of stock.

M1 goes down as physical money decreases.

c) Justine sells some rare Pokemon cards and deposits the proceeds into her checking account.

M1 goes up

d) M1 goes down and M2 goes up.

b) Jamie withdraws funds from her checking account and uses them to buy shares of stock.

c) Justine sells some rare Pokemon cards and deposits the proceeds into her checking account.

d) Jessica takes some cash from her pocket and deposits it into her saving account.