Final answer:
The term 'credit limit' refers to the maximum amount an individual is authorized to use. In the context of the money supply, traveler's checks and currency fall under M1, while checking deposits are M1, and money market accounts are included in M2. The credit line itself is not part of either M1 or M2.
Step-by-step explanation:
The answer to the student's question, which identifies the maximum amount of money that an individual is authorized to use, is credit limit. The credit limit is the preset borrowing limit set by the lender which should not be exceeded by the borrower. It applies to various credit instruments such as credit cards or lines of credit.
To address the question regarding which items fall into M1 and M2 categories, here's a breakdown:
- Your $5,000 line of credit on your Bank of America card is neither M1 nor M2, as it represents potential borrowing capacity, not actual money.
- $50 dollars' worth of traveler's checks you have not used yet are included in M1, as traveler's checks are considered highly liquid assets.
- The $1 in quarters in your pocket is part of M1, as it is currency in circulation.
- $1200 in your checking account is also part of M1, which includes checking deposits.
- The $2000 you have in a money market account is included in M2. M2 comprises near money or less liquid financial assets, including money market accounts.
Understanding the difference between M1 and M2 is essential as M1 is easier to spend since it includes currency and checks, while M2, which contains savings deposits and other less liquid assets, generally requires additional steps to convert into spendable forms.