Question at position 13 Fred Jones withdraws $1,000 in cash from his long-term savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ? M1 will increase; M2 will decreaseM1 will not change; M2 will decreaseM1 will not change; M2 will not changeM1 will decrease; M2 will not changeM1 will increase; M2 will not change单项选择题
A
M1 will increase; M2 will decrease
B
M1 will not change; M2 will decrease
C
M1 will not change; M2 will not change
D
M1 will decrease; M2 will not change
E
M1 will increase; M2 will not change

Question

Question at position 13 Fred Jones withdraws $1,000 in cash from his long-term savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ? M1 will increase; M2 will decreaseM1 will not change; M2 will decreaseM1 will not change; M2 will not changeM1 will decrease; M2 will not changeM1 will increase; M2 will not change单项选择题

A

M1 will increase; M2 will decrease

B

M1 will not change; M2 will decrease

C

M1 will not change; M2 will not change

D

M1 will decrease; M2 will not change

E

M1 will increase; M2 will not change

BlackTom AI · Accepted Answer

M1 includes currency in circulation, checkable (demand) deposits, and other liquid payment forms; M2 equals M1 plus near-money assets such as savings deposits, small time deposits, and retail money market funds. A long-term savings account is part of M2 but not part of M1.

Step-by-step reasoning:
1. Before the withdrawal: assume M1 = M10 and M2 = M2_0, where M2_0 = M10 + Savings0 + other M2 components.
2. Fred withdraws $1,000 in cash from his long-term savings account. The bank reduces the savings deposit by $1,000 and hands Fred $1,000 in currency.
3. Effect on M1: currency increases by $1,000, so M1 increases by +$1,000.
   - Change in M1 = +$1,000.
4. Effect on the savings component of M2: savings deposits fall by $1,000, so that component decreases by -$1,000.
   - Change in Savings = -$1,000.
5. Effect on M2: since M2 = M1 + Savings + other components, the net change in M2 = Change in M1 + Change in Savings = (+$1,000) + (−$1,000) = $0.

Intermediate arithmetic:
- M1_new = M10 + 1,000.
- Savings_new = Savings0 − 1,000.
- M2_new = (M10 + 1,000) + (Savings0 − 1,000) + other = M2_0.

Why the correct answer is correct:
The transaction merely shifts $1,000 from a non‑M1 component (savings) into an M1 component (currency). Total M2 is unchanged because M2 already counted both forms; it’s a reclassification, not a creation or destruction of money.

Why other options are incorrect:
- Any option claiming M2 decreases is wrong because the added currency offsets the lost savings deposit.
- Options saying M1 does not change or decreases are wrong because currency is part of M1 and increases by the withdrawal amount.

Conclusion: M1 will increase; M2 will not change — this matches the provided correct answer.

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