Question:
If you withdraw cash from your current account and put it under your mattress, how does it affect M1 and M2 monetary aggregates?
(1) Increases M1 and decreases M2.
(2) Increases M2 and decreases M1.
(3) It does not affect both M1 and M2.
(4) Decreases both M1 and M2.
(5) Increases both M1 and M2.
Correct Answer:
(3)
Answer Explanation:
M1 includes currency in circulation and demand deposits (current accounts). Withdrawing cash from a current account merely changes the composition of M1 (less in deposits, more in cash), keeping the total unchanged. Since M1 is part of M2, M2 also remains unaffected.
Topic: Money and Banking Year: 2023
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