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Checkable deposits in banks reduced in the period, but checkable deposits in thrift institutions increased. Hence, there was an increase in overall M1 level between the periods of one year from Nov 2010 to Nov 2011.
In terms of M2, only M1 and saving deposits showed an increased. There was a fall in retail funds and small denomination of time deposits. But the increase in M1 and saving deposits was higher than the decrease in other components and hence M2 showed an increase over a period of one year from November 2010 to November 2011.
a) There won’t be any change to M1 since both the currency in circulation and checking account are part of M1. Hence shifting money from one head to another won’t have any impact on the total size of M1 and it will remain unchanged.
b) There won’t be any change to M1 since the money is simply being transferred from one head of the M1 to another. Since M1 is part of M2 and there isn’t any change to M1, therefore M1 and M2 both will remain unchanged.
c) There won’t be any change to M2. Since the money has been transferred to M1 base, but since M1 is part of M2, there won’t be any change to M2. However, M1 will rise by the amount of purchases since the money has been converted from saving account to money and notes in circulation.
d) When Fed buys Treasury bills from the banks its liabilities and assets accounts both are being reduced. Since Treasury Bills represents the money that the Fed owes to commercial banks, therefore the reduction in Treasury Bills or purchase of Treasury Bills by the Fed is going to reduce the bank’s liability. At the same time, the Fed will have to pay cash to commercials banks as a settlement for purchase of Treasury Bills and therefore there will be a reduction in Fed’s assets as well. Therefore both the assets and liabilities sides of the balance sheet will get affected
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