Final answer:
An amount of cash for small payments is known as petty cash. Money is categorized as M1 and M2 based on liquidity, with M1 being the most liquid like cash and checking accounts, and M2 including less liquid assets like money market accounts.
Step-by-step explanation:
An amount of cash kept on hand and used for making small payments is known as petty cash. When it comes to different forms of money and their classifications within the economy, economists use terms like M1 and M2 to specify different levels of liquidity. Liquidity refers to how quickly a financial asset can be used to purchase goods and services. Below is the classification of the given items into M1, M2, or neither:
- a. Your $5,000 line of credit on your Bank of America card is neither M1 nor M2 since it's a form of credit, not actual money available to you.
- b. $50 dollars' worth of traveler's checks you have not used yet falls into the category of M1 because traveler's checks are a substitute for cash and can be used for transactions easily.
- c. $1 in quarters in your pocket is classified as M1 since it's currency and is readily available for use.
- d. $1200 in your checking account is included in M1 as it consists of liquid assets that are quickly accessible for transactions.
- e. $2000 you have in a money market account is considered part of M2 since it's not as liquid as M1 and generally includes savings deposits and other slightly less liquid assets than those in M1.