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

Question

Quizplus · Accepted Answer

Cashing in a Certificate of Deposit (which is part of M2 but not M1) to acquire traveler's checks (which are part of M1) increases M1 without changing M2, as the total money supply remains the same but its composition changes.

Suppose You Cash in a Certificate of Deposit (A Small