Final answer:
Withdrawing cash from a savings account results in a decrease in M1 and M2 money supplies, while M0 remains unaffected. More individuals willing to borrow or lend increases the availability of loans in the loanable funds market. If reserve requirements rise, the money multiplier effect is reduced, leading to less loan creation and a decreased money supply.
Step-by-step explanation:
When a household consumer withdraws $5000 from their savings account, M0 (which represents physical money like coins and notes) will not necessarily change, as the consumer is simply converting their savings into physical cash. However, both M1 and M2 will decrease. M1 includes money that can be easily accessed and used for transactions such as currency and checkable (demand) deposits, while M2 includes M1 along with savings deposits, money market securities, and other types of near-money. When money is taken out of a savings account, although it does not change the M0, it reduces the M1 and M2 since there is a reduction in savings deposits.
Situations that could increase rates in the loanable funds market may include more people wanting to borrow, which increases the demand for loans, and more people wanting to lend, which increases the supply of loans. When banks make loans and deposit this money into a demand deposit account, it increases the M1 money supply since this money is now available for transactions. Conversely, if there is an increase in the reserve requirement, it would decrease the money multiplier process because banks would have to hold a larger portion of their deposits in reserves rather than lending it out, which would reduce the creation of loans and thus the money supply.