If you take \(\$ 100\) out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change?

Understanding the concept of money supply is crucial for grasping the intricacies of macroeconomics. Money supply refers to the total amount of currency and other liquid instruments in an economy at a given time. It can be broken down into several categories, with M1 and M2 being the most commonly referred to. M1 includes forms of money that are highly liquid, such as currency in circulation (notes and coins) and checkable deposits (demand deposits).

When analyzing situations such as depositing currency from a piggy bank into a checking account, it is vital to recognize that while the form in which the money is held changes, the total money supply—specifically M1—does not. This concept holds the key to understanding why neither M1 nor M2 change in the given exercise.

Currency circulation pertains to the physical money moving within the economy outside of the banking system. This includes all the coins and bills that are being used by the public to purchase goods and services, pay debts, or any other transactions. It is a vital part of M1 as it reflects the most immediate and readily accessible form of money for transactions. For instance, when \(100 is withdrawn from a piggy bank and then deposited into a bank account, the currency shifts from personal holdings to becoming a part of the banking system's ledger. Despite this shift, the \)100 remains within the realm of currency in circulation because it can easily be accessed and used for transactions.

Demand deposits are bank account balances that can be accessed and withdrawn at any time without prior notice to the bank—they are essentially the funds in your checking account. These deposits form a significant component of M1 money supply because of their high liquidity; they can rapidly segue into cash or be used for payments, almost like currency itself. The exercise's example of moving money from a piggy bank to a checking account illustrates how physical money can transform into a demand deposit while still maintaining its status in the M1 category, thereby not altering the overall M1 money supply.

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It encompasses a broad range of topics including inflation, national income, growth rate, and money supply. A macroeconomic perspective is imperative when assessing how actions at an individual level—like depositing $100 from a piggy bank to a checking account—affect the broader monetary aggregates such as M1 and M2. By understanding macroeconomic principles, one can comprehend why such a transaction does not impact the overall money supply, reaffirming the interconnectedness of individual financial behaviors and the wider economy.