Question

If Ann were to convert some of her checkable deposits into a certificate of deposit, which of the following changes would take place?

a. M1 would decrease and then increase; M2 would increase and then decrease
b. There would be no changes to Ml or M2
c. Ml would decrease; there would be no change in M2
d. Ml would increase; M2 would increase.
e. M1 would decrease; M2 would decrease

Answer 1

c. Ml would decrease; there would be no change in M2

Step-by-step explanation:

M1 is one of the narrowest definition of money supply, M1 is defined as the currency held by the public plus demand deposits or checkable deposits balances.

M2 is a wider definition of money stock than M1. It is important to note that M2 is a combination of m1 plus time deposits.

If Ann converts some of her checkable deposits into a certificate of deposit, this action will decrease the balance in M1 because checkable deposits is a component of M1. But M2 will not change because M2 is a composition of both M1 and time deposit (i.e. certificate of deposit), it will only means a reclassification within the same class.