Final answer:
Items (b), (c), and (d) are in M1 because they are very liquid, while item (e) is in M2 as it includes money market funds, which are less liquid than M1. Item (a) is neither in M1 nor M2 as it is a line of credit, not actual money.
Step-by-step explanation:
Understanding M1 and M2 Money Supplies
The concept of M1 and M2 money supplies is an important part of understanding monetary economics, and it applies to how money is classified based on its liquidity. M1 includes forms of money that are very liquid, such as cash and checking accounts, while M2 includes all of M1 plus savings deposits, money market funds, and other types of accounts that are less liquid. Let's categorize the provided items into M1, M2, or neither:
- a. Your $5,000 line of credit on your Bank of America card is neither M1 nor M2 because it represents a potential loan rather than actual money available to you.
- b. $50 dollars' worth of traveler's checks you have not used yet are considered part of M1 because traveler's checks are a form of check that can be easily converted to cash.
- c. $1 in quarters in your pocket is part of M1 since it is physical cash.
- d. $1200 in your checking account is also part of M1 because funds in checking accounts are very liquid and can be used for transactions easily.
- e. $2000 you have in a money market account would be considered part of M2. Money market accounts are less liquid than checking accounts and, while they can be accessed relatively easily, they are not used directly for transactions like M1 money is.
Understanding these distinctions helps in creating a budget and planning for financial stability.