Suppose you cash in a Certificate of Deposit a small time deposit) to acquire the travelerʹs checks youʹll need for your vacation. What happens to M1 and M2?
A) M1 increases and M2 stays the same.
B) M1 and M2 both increase.
C) M1 stays the same and M2 increases.
D) M1 increases and M2 decreases.

Question

Quizplus · Accepted Answer

When you cash in a Certificate of Deposit (CD), which is part of M2, and convert it into traveler's checks, which are part of M1, M1 increases because traveler's checks are included in M1. M2 stays the same because the decrease in the CD is offset by the increase in traveler's checks, both of which are components of M2.

Suppose You Cash in a Certificate of Deposit a Small