Recent financial turmoil has caused many people to increase saving and

Recent financial turmoil has caused many people to increase saving and to prefer assets that are perceived to be relatively safe and liquid. What are the likely effects on M1 and M2?

What will be an ideal response?

ANSWER

Increased saving implies reduced consumption, so holding of the most liquid assets, M1, should decline. Instead, people will hold more of the less liquid, interest-bearing assets within M2. If people are shifting away from illiquid assets like corporate stock in favor of assets like money market mutual fund shares, then M2 should rise.