The Impact of Depositing Money into Checking Account

What happens when Brian takes out $5000 from his drawer and puts it in his checking account?

a. M2 decrease by $5000 dollars

b. Either M1 or M2 decreases by $5000

c. M1 increase by $5000 dollars

d. All of the above are correct

Answer:

When Brian takes out $5000 from his drawer and puts it in his checking account, either M1 or M2 increases by $5000 dollars (depending on the definition used), but the bank does not loan out any of the $5000. Therefore, the correct statement is that M1 increases by $5000 dollars.

When Brian takes out $5000 from his drawer and deposits it into his checking account, the M1 money supply increases by $5000 dollars. This is because the money becomes part of the liquid funds available in the checking account, contributing to the M1 money supply.

Checking accounts are a type of demand deposit account that allows you to deposit money, make withdrawals, and access funds through various means such as checks, ATMs, and electronic transfers. By depositing money into a checking account, you increase your liquid funds and have easy access to your money for daily expenses and payments.

It is important to note that while M1 increases by $5000 dollars in this scenario, the bank does not loan out any of the deposited $5000. Instead, the money stays within the checking account, ready for the account holder to use as needed.

Overall, depositing money into a checking account has a direct impact on the M1 money supply, increasing the availability of liquid funds for individuals and contributing to the overall financial system.