Money and Banking Essay

5222 WordsOct 22, 201321 Pages
Money, Banking, and the Federal Reserve System 1. For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2? a. You sell a few shares of stock and put the proceeds into your savings account. b. You sell a few shares of stock and put the proceeds into your checking account. c. You transfer money from your savings account to your checking account. d. You discover $0.25 under the floor mat in your car and deposit it in your checking account. e. You discover $0.25 under the floor mat in your car and deposit it in your savings account. Solution 1. a. Shares of stock are not a component of either M1 or M2, so holding fewer shares does not decrease either M1 or M2. However, depositing the money into your savings account increases M2, since savings accounts are part of M2 (but not part of M1). M1 does not change. b. Shares of stock are not a component of either M1 or M2, and so holding fewer shares does not decrease either M1 or M2. However, depositing the money into your checking account increases M1, since checking accounts are part of M1. It also increases M2, since M1 is part of M2. c. Moving money from savings to checking has no effect on M2, since both savings accounts and checking accounts are included in M2. However, since savings accounts are not part of M1, moving money from savings to checking does increase M1. d. Depositing cash into a checking account does not change M1 or M2. You are simply transferring money from one component of M1 (currency in circulation) to another component of M1 (checkable deposits). e. Depositing $0.25 into your savings account has no effect on M2, since both savings accounts and currency in circulation are in M2. However, since savings accounts are not part of M1, depositing the $0.25 into your savings account reduces M1. 2. There are three types of money: commodity money,

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