If you cash a $60 traveler\'s check at a bank, by how much do(es) (a) M1 change?
ID: 1131419 • Letter: I
Question
If you cash a $60 traveler's check at a bank, by how much do(es) (a) M1 change? Decreases by $60 Increases by $60 No change Not enough information (b) M2 change? Increases by $60 Decreases by $60 Not enough informatio No change (c) Bank reserves change? Increases by $60 Not enough information No change Decreases by $60 If you deposit the traveler's check in your bank account (i.e., a transactions account), by how much do(es) (d) M1 change? Not enough information No change Decreases by $60 Increases by $60Explanation / Answer
(a)
Since M1= cash with the public + traveler's check + checkable accounts.
If an individual cash a $60 traveler's check at a bank, then M1 does not change because at the time of cash of $60 traveler check at the bank, $60 decreases from checkable accounts and increase in the form of the cash.
Hence net effect is zero.
Hence option third is the correct answer.
Option third; no change
(b)
Since M2 = M1+ saving accounts + small certificate deposits.
Since M1 does not change If an individual cash a $60 traveler's check at a bank. Hence there will be no effect on the M2 also.
Hence option fourth is the correct answer.
Option fourth; No change.
(c)
The bank reserve change by the amount = change in the deposit * required reserve ratio
Hence If an individual cash a $60 traveler's check at a bank, then the change in the bank reserve cannot be calculated with the given information.
Hence option second is the correct answer.
Option second first; not enough information.
(d)
Since M1= cash with the public + traveler's check + checkable accounts.
If individual deposits $60 checks in the account of any individual Bank accounts. Then, $60 will be transferred from the account of the individual into the accounts of another individual account. It means the same amount has been transferred from one account to another account.
It means M1 does not change.
Hence option second is the correct answer.
Option second; no change.
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