If you withdraw $100 from your checking account and use the money to purchase a 14-month CD (certificate of deposit), M1 [ Select ] and M2 [ Select ]

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Question restatement: If you withdraw $100 from your checking account and use the money to purchase a 14-month CD (certificate of deposit), M1 [ Select ] and M2 [ Select ].

Option analysis:
- First part (M1): The statement option suggests M1 would fall. In reality, M1 is the sum of currency in circulation plus checkable deposits. When you withdraw $100 from checking (reducing checkable deposits by $100) and immediately use that cash to buy a CD (which is a time deposit and not a checkable deposit), you are transferring funds from a checkable deposit to currency for the withdrawal, but the total M1 remains the same because currency increases by $100 while checkable deposits decrease by $100. The net effect on M1 is zero, not a drop. Therefore, the idea that M1 falls is incorrect; M1 remains unchanged in this scenario.

- Second part (M2): The statement suggests M2 remains unchanged. M2 includes M1 plus certain near money assets such as savings deposits and small time deposits (including CDs under $100,000). If the 14-month CD qualifies as a small time deposit (i.e., under the $100,000 threshold), it is counted in M2. Moving $100 from a checkable deposit into a CD reduces the M1 component but adds to the M2 time deposit component, leaving the total M2 unchanged. Thus, M2 remains unchanged under typical definitions. However, if the CD amount were over $100,000, the CD would be considered a larger time deposit and not included in M2, potentially changing the M2 total. Since the question specifies a 14-month CD without an amount identical to the threshold, the common interpretation is that this CD is included in M2, so M2 remains unchanged.

Summary reasoning for the two selections:
- The claim that M1 falls is inconsistent with how M1 is defined; moving funds from checkable deposits to currency preserves the total M1, so this option is incorrect for M1.
- The claim that M2 remains unchanged is correct under standard definitions if the CD is a small time deposit (under $100,000). In that common case, the shift does not alter the overall M2 total because one component (M1) decreases while another component (the CD) increases by the same amount.
- As a caveat, if the CD amount exceeds $100,000, the CD would not be part of M2, which could make M2 decline by the amount moved into the CD. This edge case highlights why the interpretation depends on the CD’s size.

Applied to the problem as stated, the typical, conventional answer would be: M1 remains unchanged and M2 remains unchanged (with the caveat noted above).

FA25 ECON 302 002 Midterm Exam #3 (Chapters 7-9): Sample Questions

If you withdraw $100 from your checking account and use the money to purchase a 14-month CD (certificate of deposit), M1 [ Select ] and M2 [ Select ]

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