Changes in M1 and M2 with purchases

Question

Julie buys $1,000 worth of American Express travelers' checks and charges the purchase to her American Express card. What is the immediate change in Ml and M2? Explain.

Answer 1

The transaction leaves M1 unchanged, but increases M2 by $1,000.

The use of a credit card is effectively the same as taking out a loan—that loan is a liability for the borrower.