Question

For each of the following balance sheet items, indicate the appropriate classification category from the dropdown list?

Answer 1

The items a line of credit, traveler's checks, quarters, checking account balance, and money market account are classified as neither, M1, M1, M1, and M2 respectively, according to their liquidity and the definitions of M1 and M2 money supply categories.

Step-by-step explanation:

The question asks to classify certain monetary items as being part of M1, M2, or neither. M1 and M2 are different categories of the money supply. M1 includes forms of money that are very liquid or can be quickly converted to cash, whereas M2 includes all of M1 plus savings deposits, money market mutual funds, and other time deposits which are less liquid.

• M1 includes currency in circulation, traveler's checks, and checking account balances.
• M2 includes everything in M1 plus savings deposits, money market accounts, and other near monies.

Applying this to the given items:

1. Your $5,000 line of credit on your Bank of America card would be neither M1 nor M2 as it is a form of potential borrowing, not actual currency or deposits.
2. $50 dollars' worth of traveler's checks you have not used yet falls into M1 since traveler's checks are very liquid and considered money on hand.
3. $1 in quarters in your pocket is considered M1 because it is physical currency in circulation.
4. $1200 in your checking account is also part of M1 as it is in a checking account and very liquid.
5. $2000 you have in a money market account is included in M2 because money market accounts are less liquid, yet still accessible.