CFA Level 1: Impact of Selling CD's and Investing in Stock Mutual Fund on M2 and Transactions

How Selling CD's and Investing in Stock Mutual Fund Affects M2 and Available Money for Transactions

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Question

Mr. Taylor states in his will that his $50,000 portfolio of bank CD's will go to his only son. Upon Mr. Taylor's death, the son sells the CD's and invests the proceeds in a stock mutual fund.

How does this immediately impact M2 and the effective amount money available for transactions?

Answers

Explanations

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Explanation

Prior to Mr. Taylor's death, the CD's were counted as part of M2. In addition, this money was not used for current consumption. After the sale of the CD's, the money is still not being used for current consumption, but it is now not counted as part of M2. The real level of money in circulation has not changed here, but the measure of the money supply has decreased. This is an example of a distortion of money supply measures.

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