Hideo and Hannah decide to go on a vacation. As a result, they withdraw $5,000 from their savings account to purchase $5,000 worth of traveler's checks. As a result of these changes,
A)M1 increases by $5,000 and M2 decreases by $5,000.
B)M1 increases by $5,000 and M2 stays the same.
C)M1 and M2 stay the same.
D)M1 decreases by $5,000 and M2 increases by $5,000.

Question

Quizplus · Accepted Answer

Traveler's checks are part of M1, so when they are purchased, M1 increases by $5,000. Since the savings account is part of M2, and the traveler's checks are also part of M2, the overall M2 remains unchanged.

Hideo and Hannah Decide to Go on a Vacation