If you withdraw $100 from your checking account and deposit it in your savings account, M1 falls and M2 is unchanged .

Question

BlackTom AI · Accepted Answer

We’re analyzing the impact of moving $100 from checking to savings on money aggregates.
Option A: falls. This option asserts that M1 decreases when money leaves the checking account. Since M1 includes currency and checkable deposits (like checking accounts), transferring funds out of checking reduces the amount classified as M1, so this statement is consistent with the standard definitions of M1.
Option B: is unchanged. This option claims that M2 remains the same despite the transfer. M2 equals M1 plus certain near-money assets, including savings deposits. When you move $100 from checking to savings, M1 decreases because checkable deposits shrink, but savings deposits (a component of M2) increase by the same amount, leaving the total M2 unchanged under typical definitions. Therefore, this statement aligns with how M2 is constructed.
In summary, the action reduces M1 by $100 due to the loss of a checkable deposit, while M2 stays the same because the $100 simply shifts from M1 to a component already included in M2. Any claim saying M1 stays the same would contradict the inclusion of checkable deposits in M1, and any claim about M2 changing would contradict the idea that the transfer is within M2’s components. The expected understanding is that M1 falls and M2 is unchanged.

FA25 ECON 302 002 Homework #6 (Inflation)

If you withdraw $100 from your checking account and deposit it in your savings account, M1 falls and M2 is unchanged .

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