Final answer:
M1 includes currency, travelers' checks, and checking accounts, whereas M2 includes all of M1 plus savings and money market accounts. A line of credit is neither. Transferring money from a piggy bank to a checking account does not change M1 or M2.
Step-by-step explanation:
Understanding M1 and M2 Money Supply Components
The distinction between M1 and M2 money supply is important in understanding the liquidity and accessibility of various assets. M1 includes money that is very liquid, such as cash and assets that can quickly be converted to cash. M2 includes M1 plus savings deposits, small-denomination time deposits, and non-institutional money market funds.
M1 includes currency in circulation, travelers' checks, and checking account balances. So, $1 in quarters in your pocket and $50 worth of traveler's checks you have not used yet, as well as the $1200 in your checking account, are part of M1.
M2 includes M1 plus savings deposits, small time deposits, and money market funds. Therefore, the $2000 in a money market account you have is part of M2.
A $5,000 line of credit is not included in M1 or M2 because it is a form of potential borrowing and not an asset that is readily available as cash.
If you take $100 out of your piggy bank and deposit it in your checking account, M1 does not change because cash and checking deposits both are components of M1. M2 also remains the same because M2 includes all of M1.