Question

Suppose that M2 has recently gone down even though small-denomination time deposits have gone up. Which of the following is consistent with this?

a. Demand deposits have gone up by more than small-denomination time deposits have increased.

b. Currency (held outside banks) has fallen by more than small-denomination time deposits have increased.

c. M1 has fallen by less than small-denomination time deposits have increased.

d. Other liquid deposits have increased.

Answer 1

If M2 has recently gone down while small-denomination time deposits have gone up, it suggests that one or more components of M2 have decreased. An increase in demand deposits, other liquid deposits, or a decrease in M1 would not cause M2 to decrease.

Step-by-step explanation:

If M2 has recently gone down while small-denomination time deposits have gone up, it suggests that one or more components of M2 have decreased.

Option a is incorrect, as an increase in demand deposits would not cause M2 to decrease.

Option b is correct. If currency held outside banks has fallen by more than small-denomination time deposits have increased, it would result in a decrease in M2.

Option c is incorrect, as a decrease in M1 would not cause M2 to decrease.

Option d is incorrect, as an increase in other liquid deposits would cause M2 to increase rather than decrease.