Fred C.

asked • 22d

How the money multiplier changes the M1 and M2


I would like to know if my answer to the question below is correct:

Question: How much does M1 and M2 change in the following situations?

$500 is transferred from a checking to a savings account.

Answer: M1 decreases and M2 stays the same.

Explanation: Since M1 includes currency in circulation, removing cash from a checking account would decrease the money supply. Since M2 includes M1 + savings deposits, putting cash in a savings account would not change the money supply, since the cash would be the same amount put into a different deposit.

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