Question

If you withdraw $100 from your checking account and put it in your savings account,

A. M1 decreases by $100.
B. M2 increases by $100.
C. M1 decreases by $100 and M2 increases by $100.
D. M2 decreases by $100 and M1 increases by $100.
E. there is no immediate change in the money supply.

Answer 1

M1 includes cash and checking deposits.

M2 includes all elements of M1 as well as "near money (savings deposits, money market securities, mutual funds, and other time deposits)

In our example, M1=100 is transferred to M2.

When you withdraw $100 from checking account and put it in your savings account, the following are true:
A. M1 decreases by $100.
B. M2 increases by $100.
C. M1 decreases by $100 and M2 increases by $100.
E. there is no immediate change in the money supply.

While D. M2 decreases by $100 and M1 increases by $100 is not true.