Final answer:
Withdrawing $2,000 from a checking account to buy a CD decreases M1 but has a neutral effect on M2, as the money just shifts within the different components that make up M2.
Step-by-step explanation:
When a student decides to withdraw $2,000 from their checking account to purchase a certificate of deposit (CD), this action changes the composition of the money supplies known as M1 and M2. M1 includes forms of money that are very liquid, such as cash and checking deposits. By withdrawing $2,000, M1 decreases because there is less money in the checking account. However, because the money is now in a CD, it is still within M2. M2 includes M1 plus savings accounts, money market funds, and small-denomination time deposits like CDs. Thus, the overall effect on M2 is neutral—the money moves from one category within M2 to another, but the total amount of money in M2 remains the same.