John and Jane decide to go on a vacation.As a result,they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks.As a result of these changes,
A)M1 increases by $2,500 and M2 decreases by $2,500.
B)M1 increases by $2,500 and M2 stays the same.
C)M1 and M2 stay the same.
D)M1 decreases by $2,500 and M2 increases by $2,500.

Question

Quizplus · Accepted Answer

M1 (the sum of currency in circulation, demand deposits, and other checkable deposits) increases by $2,500 because the traveler's checks are considered as part of M1. However, M2 (a broader definition of money that includes M1 plus savings deposits, time deposits, and non-institutional money market funds) stays the same because the $2,500 withdrawn from their savings account is offset by the traveler's checks purchased.

John and Jane Decide to Go on a Vacation