Question

Determine if the following changes affect M1, M2, both, or neither. 1. Holding the amount of currency and checking account balances constant, an increase in savings deposits Choose one:

A. affects neither M1 nor M2.
B. affects M1 but not M2.
C. affects both M1 and M2.
D. affects M2 but not M1.

Answer 1

An increase in savings deposits affects M2 but not M1, as savings deposits are only included in the M2 money supply measure.

Step-by-step explanation:

The student is asking about the impact on money supply measures, specifically M1 and M2, due to an increase in savings deposits while holding the amount of currency and checking account balances constant.

M1 consists of currency in the hands of the public, traveler's checks, and checking deposits. In contrast, M2 includes all of M1 plus savings deposits, money market accounts, and other near-monies. Given that savings deposits are part of M2, an increase in savings deposits affects M2 but not M1. Therefore, the correct answer to the student's question is that the change affects M2 but not M1.