**Question:**Suppose your bank lowers its minimum balance requirement by $500. So, you take $500 out of your checking account and invest in Money Market Mutual Funds. What is the overall effect on M1 and M2?**Options:**a. M1 falls by $500, M2 rises by $500.b. M1 is unchanged, M2 is unchanged.c. M1 falls by $500, M2 is unchanged.d. M1 is unchanged, M2 rises by $500.**Explanation:**In this scenario, withdrawing $500 from your checking account decreases the M1 money supply, which includes physical currency and coin, demand deposits, traveler's checks, and other checkable deposits. Since checking accounts are part of M1, withdrawing this amount reduces the value of M1.Investing these funds in Money Market Mutual Funds, which are part of M2 (the broader money supply), increases the value of M2. M2 includes all of M1 along with savings deposits, money market mutual funds, and other time deposits (less than $100,000).Therefore, the correct effect would be reflected in option a, where M1 falls by $500, and M2 rises by $500.

Money is divided into mainly M1 , M2 and M3 so here by concluding the all components here we find…

2. Suppose your bank lowers its minimum balance requirement by $500. So you take $500 out of your checking account and invest in Money Market Mutual Funds. What is the overall effect on M1 and M2? a. M1 falls by $500, M2 rises by $500. b. M1 is unchanged, M2 is unchanged. c. M1 falls by $500, M2 is unchanged. d. M1 is unchanged, M2 rises by $500.

2. Suppose your bank lowers its minimum balance requirement by $500. So you take $500 out of your checking account and invest in Money Market Mutual Funds. What is the overall effect on M1 and M2? a. M1 falls by $500, M2 rises by $500. b. M1 is unchanged, M2 is unchanged. c. M1 falls by $500, M2 is unchanged. d. M1 is unchanged, M2 rises by $500.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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