The M1 money supply will fall and the M2 money supply won't change if checkable deposits fall by $40 billion and money market mutual fund balances rise by $40 billion.
There are various ways to define money: Currency and funds from checking accounts are included in M1 (demand deposits). Although they are still included in M1, traveler's checks are becoming less common. All of M1 as well as savings deposits, time deposits like certificates of deposit, and money market funds are included in M2, as well.
Because M2 includes M1 as one of its constituents along with other liquid assets that are not readily convertible into cash, M2 is a more stable measure of money supply than M1. Additionally, the M1 money supply does not contain all of the components of M2.
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