Final answer:
In accounting, a credit is an entry on the right side of an account ledger, impacting the balance either by increasing or decreasing, depending on the account type. In terms of the money supply, a line of credit does not fall under M1 or M2 as it is not actual money in circulation. However, traveler's checks, physical currency, checking account balances, and money in a money market account are considered part of M1 and M2.
Step-by-step explanation:
A credit in accounting does not refer to whether an event is favorable or unfavorable. Instead, it is a term that is used within the accounting system to describe one type of entry in the double-entry bookkeeping method. When a transaction occurs, two entries must be made: a debit and a credit. A debit (dr) entry is recorded on the left side of an account ledger, and a credit (cr) entry is recorded on the right side. The impact of a credit on an account depends on the type of account. For example, crediting a revenue account will increase it, while crediting an expense account will decrease it.
From the context of the choices provided, if we are referring to the effect of a credit on the balances in a typical accounting system:
- a. increases - might apply to revenues or liabilities
- b. decreases - might apply to assets or expenses
- c. has no effect on - would not typically apply because credits always have an effect, whether increasing or decreasing the account balance.
In the context of economics and money supply, credit would be considered in different terms:
For the list of items regarding M1, M2, or neither:
- Your $5,000 line of credit on your Bank of America card - Neither, since it's a line of credit and not actually money in circulation.
- $50 dollars' worth of traveler's checks you have not used yet - M1, as traveler's checks are a part of demand deposits and checkable deposits.
- $1 in quarters in your pocket - M1, since it is physical currency in circulation.
- $1200 in your checking account - M1, because it's a part of demand deposits.
- $2000 you have in a money market account - M2, since it includes M1 and short-term time deposits.