Q1. What happens to M1 and M2 due to each of the following changes?
(a) You take $500 out of your checking account and put it into a passbook savings account.
(b) You take $1000 out of your checking account and buy traveler’s checks.
(c) You take $1500 out of your money-market mutual fund and deposit into your checking
account.
(d) You cash in $2000 in savings bonds and invest the money in a certificate of deposit.
Answers:
(a) M1 falls $500, M2 is unchanged (remember that M1 is part of M2).
(b) M1 and M2 are both unchanged.
(c) M1 rises $1500, M2 is unchanged.
(d) M1 is unchanged, M2 rises $2000.
Q2. How would each of the following affect national saving, investment, the current account
balance, and the real interest rate in a large open economy?
a. An increase in the domestic willingness to save (which raises desired national saving at any
given real interest rate).
Ans. The home country’s saving curve shifts to the right, from S1 to S2 in Figure 5.5. The real
world interest rate falls, so that the current account surplus in the home country equals the
