M1 is the most liquid money supply. It includes, cash, demand deposits and other deposits.
M2 is less liquid than M1. It includes M1, time deposits, money market funds.
When $1000 was in time deposits, it was a part of M2 but not M1.
When this moved to demand deposits, it became a part of M1.Since M1 is a part of M2, this $1000 is still a part of M2.
So, M1 increases and M2 stays the same.
Option A: Incorrect
M2 cannot decrease as $1000 is still a part of M2 as M1 is a part of M2.
Option B: Incorrect
$1000 is being added in M1, so M1 should increase.
Option C: Incorrect
M1 cannot stay same as demand deposits are a part of M1.
Correct Option : Option D