Final answer:
The categorization of money in M1 and M2 can be explained: M1 is very liquid, like cash and checking accounts; M2 includes M1 plus savings, time deposits, and money markets.
Step-by-step explanation:
M1 includes money that is very liquid, such as cash and checking account balances. M2 includes M1 plus other, less liquid financial instruments that can be quickly converted to cash.
M1: Includes money that is readily available for transactions, such as:
Currency in circulation
Checking account balances
Other checkable deposits
Traveler's checks
M2: Includes all of M1 plus:
Savings deposits
Time deposits
Money market funds
Other near monies
Based on this categorization:
a. Your $5,000 line of credit on your Bank of America card is neither M1 nor M2 because it is not money but credit.
b. $50 dollars' worth of traveler's checks you have not used yet fall into M1, because traveler's checks are part of the money supply used for transactions.
c. $1 in quarters in your pocket is part of M1 because it is currency readily available for use.
d. $1200 in your checking account is part of M1 as it is money in a transactional account.
e. $2000 you have in a money market account is part of M2 because money market accounts are less liquid than transaction accounts, but still easily convertible to cash.