Ava buys a $2,000 computer using a paper check. At which step does $2,000 get recorded in M1?
A) When Ava hands the $2,000 check to the computer merchant.
B) Once the $2,000 is credited to the merchant bank's reserve account and is debited from Ava's bank account.
C) Once the Federal Reserve sends the paper check (or an electronic image) to Ava's bank.
D) The check is never M1. The $2,000 is M1 both in Ava's bank account and, later, in the merchant's account. It is the deposit balance that is counted.

Question

Quizplus · Accepted Answer

M1 includes liquid forms of money, such as currency and checking deposits. The $2,000 remains part of M1 throughout the transaction process, first in Ava's account and then in the merchant's account after the check is processed. The physical check itself is not M1; rather, it's the deposit balances that are counted in M1.

Ava Buys a $2,000 Computer Using a Paper Check