What is the effect on the money supply when you transfer $150,000 from your checking account to your savings account?

a) Decrease M1; increase M2

b) Decrease M2; increase M3

c) No effect on M1; increase M2

d) No effect on M2; increase M3

e) Decrease M2; no effect on M3

Decrease in M1; No effect on M2

Explanation:

Monetary aggregates is as follows:

M1 consists of:

= Currency with the public + Checking/Demand deposits + Other deposits with the RBI

M2 consists of:

= M1 + Post office savings account deposits

Effect on M1:

If a person transfer money from checking account to savings account, so there is a fall in M1 because the amount in checking account is reduced.

Effect on M2:

If a person transfer money from checking account to savings account, then there is a fall in checking account and at the same time there is a rise in the savings account. M1 is a component of M2.

Therefore, there will be no effect on M2.