Final answer:
In monetary terms, M1 represents liquid forms of money such as cash and checking account balances, while M2 includes M1 plus savings-related assets like money market accounts. Traveler's checks are part of M1, whereas a line of credit is neither M1 nor M2. An overdraft happens when a check is written for an amount exceeding the account balance.
Step-by-step explanation:
In the context of money supply classifications, understanding which types are considered M1 or M2 is essential. M1 includes money that is very liquid, such as coins, currency, and checking account balances that can be used directly for transactions. M2 includes all of M1 plus less liquid savings accounts, money market accounts, and other types of accounts that can be converted to cash relatively easily.
- Your $5,000 line of credit on your Bank of America card is not included in M1 or M2, as it represents potential borrowing, not actual money.
- $50 dollars' worth of traveler's checks you have not used yet is considered part of M1 since traveler's checks are a form of check that can be used for transactions immediately.
- $1 in quarters in your pocket is part of M1 as it is physical currency.
- $1200 in your checking account is part of M1, as it's part of your available balance that can be used for everyday transactions.
- $2000 you have in a money market account would be considered part of M2 because it is less liquid than the components of M1, but still relatively easy to access.
When using a check for payment, it is crucial to have sufficient funds in your checking account. Stores receive the money through the banking system, which processes the check and transfers funds from the buyer's account to the seller's account. An overdraft occurs when one writes a check for more than the existing balance in the checking account, resulting in a negative balance and potential fees.