For each of the following transactions, what is the initial...

For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2? a. You sell a few shares of stock and put the proceeds into your savings account. b. You sell a few shares of stock and put the proceeds into your checking account. c. You transfer money from your savings account to your checking account. d. You discover $\$ 0.25$ under the floor mat in your car and deposit it in your checking account. e. You discover $\$ 0.25$ under the floor mat in your car and deposit it in your savings account.

For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2?
a. You sell a few shares of stock and put the proceeds into your savings account.
b. You sell a few shares of stock and put the proceeds into your checking account.
c. You transfer money from your savings account to your checking account.
d. You discover $\$ 0.25$ under the floor mat in your car and deposit it in your checking account.
e. You discover $\$ 0.25$ under the floor mat in your car and deposit it in your savings account.

Key Concepts

Transaction Impact on Money Supply Components

Different financial transactions can shift funds between various components of the money supply without necessarily altering the overall total. For example, converting funds from a savings account (included in M2 but not in M1) to a checking account (included in both M1 and M2) changes the composition of money within the aggregates but does not change the overall money supply.

M2 is a broader measure that includes all of M1 plus less liquid forms of money, such as savings deposits, small time deposits, and money market securities. It captures both the cash available for immediate spending and funds that can be relatively easily converted into cash.

Monetary Aggregates

Monetary aggregates are measures of the money supply that help economists assess the amount of money circulating in an economy. They are categorized into different tiers based on the liquidity of the assets included, which is important for understanding spending and saving behaviors.

M1 is the narrowest measure of the money supply and includes the most liquid forms of money—physical currency, coins, and demand deposits such as checking accounts. This category represents money that is readily available for transactions.

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