Question

Jane currently has $5,800 in her savings account and $2,000 in her checking account at the local bank. Instructions: Enter your answers as a whole number. Use a positive number to represent an increase and a negative number (−) to represent a decrease.

a. If Jane withdraws $600 in cash from her savings account, by what dollar amount will the country's money supply (M and M2 ) change as a result of Jane's actions?
b. Suppose that after Jane withdraws $600 from her checking account, she uses $410 of this money to pay her federal income tax After paying her taxes, Jane uses $140 to buy a set of used golf clubs from her neighbor, who then deposits the money into his checking account. Jane deposits the remaining cash from the $600 withdrawal into her savings account. By what dollar amount wil the country's money supply change as a result of Jane's actions?

Answer 1

Jane's financial actions involving withdrawing, spending, and depositing money, resulted in no change to the country's M1 and M2 money supply. Both M1 and M2 remain unaffected because the withdrawn funds are either redeposited or used for transactions that ensure the money remains within the supply.

Step-by-step explanation:

Jane's financial activities initially involve withdrawing $600 from her savings account, which doesn't impact the country's M1 or M2 money supply as the funds transition from one form (deposit) to another (cash). Subsequently, paying $410 in federal income taxes doesn't alter the money supply, but when she purchases golf clubs for $140 and later deposits the remaining $50 back into her savings account, the total M1 and M2 money supply remains unaffected. The $140 spent on golf clubs, when deposited, maintains the money supply, as it re-enters the banking system.

Jane's actions highlight the importance of understanding how different financial transactions, such as withdrawals, purchases, and deposits, can influence the composition of the money supply, with certain transactions leading to no net change in M1 and M2.