Question

Suppose a person transfers $300 from their checking account to a money market mutual fund. What happens to M1, M2, and reserves at the person bank? it will go up, down, or stays the same?

Answer 1

TO SOLE THIS QUESTION WE WILL NEED TO KNOW THE MEANINGS OF M1 AND M2

• M1-M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as demand deposits. These are the amounts held in checking accounts. These items together—currency, and checking accounts in banks—make up the definition of money known as M1, which is measured daily by the Federal Reserve System.

SO IF THE PERSON TRANSFERS $300 FROM THEIR CHECKING ACCOUNT TO A MONEY MARKET FUNDS THE TOTAL VALUE OF M1 WILL GO DOWN.

• M2-A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank. Many banks and other financial institutions also offer a chance to invest in money market funds, where the deposits of many individual investors are pooled together and invested in a safe way, such as short-term government bonds.

SO AS THE PERSON TRANSFERS $300 INTO THE MOMEY MARKET FUND THE VALUE OF M2 WILL RISE OR GO UP.

• RESERVES AT PERSON BANK- AS THE PERSON HAS TRANSFERRED $300 FROM HIS CHECKING ACCOUNT TO THE MONEY MARKET FUND THE TOTAL VALUE AT THE RESERVES AT PERSONAL BANK WILL REMAIN UNCHANGED OR WILL REMAIN SAME AS THE PERSON HAS JUST TRANSFERRD $300 FROM M1 TO M2 (ie-from his checking account to the money market funds)SO THE RESERVES AT THE BANK WILL REMAIN SAME AS THR PERSON HAS JUST TRANSFERRED THE AMOUNT THERE IS NO EXTRA WITHDRAWL OR DEPOSITS INSIDE THE BANK.