Question

Assume that Jimmy Cash has \(2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw \)200 of cash from the bank’s ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

Short answer

The M1 money supply will remain unchanged.

Step-by-step solution

Step 1. M1 component of the money supply

M1 is a component of the money supply that includes the currency in circulation, traveler’s checks, and checkable deposits. The currency in circulation includes notes and coins, and checkable deposits are deposits with the bank against which any size of check can be drawn.

Step 2. No change in the M1 money supply

When Jimmy withdraws $200 from the bank’s ATM, it increases the amount of the currency in circulation, but at the same time, decreases the total amount of checkable deposits. As a checkable deposit is a part of the M1 money supply, there will be a decrease of $200 in M1.

Therefore, there will be no change in the M1 money supply as the M1 money supply is still $200 because it initially decreases to $1800 when he withdrew money and then increases to $2000 when he uses the cash for the transaction.