For each of the following transactions identify by how much

For each of the following transactions identify by how much M1 and M2 change. (a) Your grandmother gives you a check for $250 as a present for your birthday. You deposit the check into your checking account. You then withdraw $50 as cash and transfer $100 into your savings account.) (B) Andreas has $2 million of funds in a retail money market mutual fund (RMMF) account that he wants to close. He uses $1 million from the RMMF account to purchase large-denomination CDs and he transfers another $750,000 into his personal savings account. He moves the remaining funds to his checking account.

Solution

M1 = Coins & currency + Checking account

M2 = M1 + Saving account + Money market funds + CD

(a)

Depositing Grandma\'s check doesn\'t change M1 or M2, since it\'s a trasnfer between two checking accounts.

Cash withdrawal doesn\'t change M1 & M2 since it\'s a movement from checking account to currency.

$100 transfer to savings account will decrease M1 by $100 & increase M2 by $100.

(b)

RMMF, CDs, checking account and savings account are all components of M2, so M2 doesn\'t change due to these transactions.

Incraese in M1 = increase in checking account = $(2 million - 1 million - 0.75 million)

= $0.25 million = $250,000