Answer:

M1 Money Supply Change Resulting from a Transaction

When Jimmy Cash withdraws $210 from his checking account at Folsom Bank, the M1 money supply decreases by $210. This is because the M1 money supply is composed of currency in circulation, traveler’s checks, and checkable deposits, all of which are liquid assets that can be quickly converted into cash. Thus, when Jimmy Cash withdraws cash from his checking account, the total amount of M1 money supply decreases by the same amount.

Components of M1 Money Supply

The M1 money supply is composed of currency in circulation, traveler’s checks, and checkable deposits. Currency in circulation is the physical cash that is in circulation, traveler’s checks are pre-printed checks that can be used to withdraw money from banks, and checkable deposits are funds that are held in checking accounts and can be withdrawn through checks or debit cards. When Jimmy Cash withdraws $210 from his checking account, the checkable deposits that make up the M1 money supply decrease by $210.

Effect of a Transaction on the Money Supply

When a transaction is made, the M1 money supply is affected in one of two ways. If cash is deposited into a checking account, the M1 money supply increases, as the checkable deposits in the M1 money supply increase. Conversely, when cash is withdrawn from a checking account, the M1 money supply decreases, as the checkable deposits decrease. Since Jimmy Cash withdrew $210 from his checking account, the M1 money supply decreases by $210.

M1 Money Supply and Economic Growth

The M1 money supply reflects the total amount of liquid assets in circulation, and it is a key indicator of economic growth. When the M1 money supply increases, economic growth is stimulated, as businesses and households have more money to spend. When the M1 money supply decreases, economic growth is slowed, as businesses and households have less money to spend. Thus, when Jimmy Cash withdraws $210 from his checking account, the M1 money supply decreases, which has a negative effect on economic growth.

Related Questions

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