Question

You decide to take $400 out of your piggy bank at home and place it in the bank. If the reserve requirement is 2 percent, how much can your $400 increase the amount of money in the economy?

Answer 1

When you deposit $100 from your piggy bank into your checking account, M1 increases by $100 and M2 remains unchanged.

Step-by-step explanation:

M1 is a measure of the money supply that includes physical currency, demand deposits, and traveler's checks. When you take $100 out of your piggy bank and deposit it in your checking account, M1 increases by $100 because the cash is now in a demand deposit account. M2 is a broader measure of the money supply that includes M1 plus savings deposits, money market mutual funds, and small time deposits. Since the money is now in a checking account, which falls under M1, M2 does not change.

Answer 2

Remember that percent increase is the amount of change divided by the original amount.