Chapter 11: Problem 376

Two definitions of money supply are $\mathrm{M}_{1}$ and $\mathrm{M}_{2}$. Differentiate between the two.

Short Answer

Expert verified

M1 money supply includes the most liquid forms of money, such as physical currency and checkable deposits like checking accounts, demand deposits, and negotiable order of withdrawal (NOW) accounts. M2 money supply is a broader measure that includes everything in M1 and some less liquid financial instruments such as savings deposits, certificates of deposit (less than $100,000), and money market funds. The main difference between M1 and M2 is that M1 focuses on the most liquid assets, while M2 includes both liquid and "near money" assets that can be easily converted into cash or checkable deposits.

Step by step solution

Define M1 money supply

M1 money supply is a measure of the total amount of money in circulation within an economy, specifically the most liquid forms of money. It includes physical currency (coins and notes) and checkable deposits like checking accounts, demand deposits, and negotiable order of withdrawal (NOW) accounts.

Define M2 money supply

M2 money supply is a broader measure of money supply than M1. In addition to including everything in M1, M2 also includes less liquid financial instruments such as savings deposits, certificates of deposit (less than $100,000), and money market funds.

Highlight the differences between M1 and M2 money supplies

The main difference between M1 and M2 money supplies is that M1 only includes the most liquid forms of money, such as physical currency and checkable deposits. On the other hand, M2 is a broader measure that includes both the liquid assets from M1 and some less liquid financial instruments like savings deposits and money market funds. The less liquid components of M2 are considered "near money" because they can be easily converted into cash or checkable deposits.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Two definitions of money supply are \(\mathrm{M}_{1}\) and \(\mathrm{M}_{2}\). Differentiate between the two.

Short Answer

Step by step solution

Define M1 money supply

Define M2 money supply

Highlight the differences between M1 and M2 money supplies

One App. One Place for Learning.

Most popular questions from this chapter

Study anywhere. Anytime. Across all devices.