Question

If you take $100 out of your piggy bank and

deposit it in your checking account, how did M1

change? Did M2 change?

Short answer

When the deposit occurs the cash is being held by the bank it is staying in an M1 categorization, so technically m1 and m2 don't change.

Step-by-step solution

Concept Introduction

M1 is the money that includes physical currency. M2 includes all the elements of M1 and it is less liquid in nature.

:Explanation of Solution

Transferring money from a piggy bank and depositing it into a checking account does not change M1 and M2 money supplies. The money and the currency in the checking accounts i.e. demand deposits are termed as M1. M2 includes everything in M1 with saving deposits and many others. When the deposit occurs the cash is being held by the bank so it does not include in M1. It doesn't play an active role in the money supply.