State the immediate effect of each of the following actions on M1 and M2 : a. Barry writes his p

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State the immediate effect of each of the following actions...

State the immediate effect of each of the following actions on $\mathrm{M}_1$ and $\mathrm{M}_2$ : a. Barry writes his plumber a check for $$\$ 200$$. The plumber takes the check to the bank, keeps $$\$ 50$$ in cash, and deposits the remainder in his savings account. b. Maureen deposits the $$\$ 1,000$$ from her $C D$ in a money market mutual fund. c. Sylvia withdraws $$\$ 50$$ in cash from her savings account. d. Paulo cashes a $$\$ 100$$ traveler's check that was issued in his Ohio bank at a New York bank. LO5

State the immediate effect of each of the following actions on $\mathrm{M}_1$ and $\mathrm{M}_2$ :
a. Barry writes his plumber a check for $$\$ 200$$. The plumber takes the check to the bank, keeps $$\$ 50$$ in cash, and deposits the remainder in his savings account.
b. Maureen deposits the $$\$ 1,000$$ from her $C D$ in a money market mutual fund.
c. Sylvia withdraws $$\$ 50$$ in cash from her savings account.
d. Paulo cashes a $$\$ 100$$ traveler's check that was issued in his Ohio bank at a New York bank. LO5

Key Concepts

M1 Money Supply

M1 represents the most liquid forms of money available for transactions. It typically includes physical currency, demand deposits (such as checking accounts), and traveler's checks. These assets are readily used for purchasing goods and services without any conversion delay, and changes in M1 reflect immediate shifts in cash and checkable deposits in an economy.

M2 Money Supply

M2 is a broader measure of money supply that includes all of M1 along with near-money assets. These additional components, such as savings deposits, money market mutual funds, and small time deposits (like certain certificates of deposit), are less liquid than M1 but can be relatively quickly converted into cash or checking deposits. M2 therefore captures a wider range of assets that households hold for non-transactional purposes.

Reclassification between Monetary Aggregates

Transactions that involve moving funds from one type of account to another can shift money between M1 and M2 without necessarily changing the overall money supply. For example, depositing cash from a checking account (part of M1) into a savings account (a component of M2) or vice versa changes the composition of the monetary aggregates. Understanding these shifts is crucial in analyzing how banking transactions affect liquidity and the distribution of assets across different monetary measures.

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