Suppose you transfer $2,000 from your mutual fund account to your checking account. What is the immediate impact of this transfer on M1 and M2?
What will be an ideal response?
Mutual fund balances are part of M2, but are not part of M1. Checking account balances are included in both money supply measures. Thus M1 will increase by $2,000 with the increase in checking account balances. M2 will not change, as the $2,000 increase in checking account balances is offset by the $2,000 decrease in mutual fund accounts.
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