Chapter 24: Problem 6

The M1 definition of the money supply consists of a. coins and currency in circulation. b. coins and currency in circulation, checkable deposits, and traveler's checks. c. Federal Reserve notes, gold certificates, and checkable deposits. d. Federal Reserve notes and bank loans.

Short Answer

Expert verified

The M1 definition of the money supply consists of coins and currency in circulation, checkable deposits, and traveler's checks (Option B).

Step by step solution

Identify the Components of M1 Money Supply

M1 money supply includes the most liquid forms of money, which are easily used for transactions. These components are: 1. Coins and currency in circulation 2. Checkable deposits (also called demand deposits) 3. Traveler's checks issued by non-banks Now, let's analyze each option to find the correct answer.

Analyze Option A

Option A states that M1 money supply consists of coins and currency in circulation. This is true but not complete, as M1 also includes checkable deposits and traveler's checks issued by non-banks. So, option A is not correct.

Analyze Option B

Option B states that M1 money supply consists of coins and currency in circulation, checkable deposits, and traveler's checks. This option correctly includes all the components of the M1 money supply definition. Therefore, option B is the correct answer.

Analyze Option C (for completeness)

Option C states that M1 money supply consists of Federal Reserve notes, gold certificates, and checkable deposits. While Federal Reserve notes are a part of the currency in circulation, gold certificates are not considered a part of M1 money supply. As a result, option C is not correct.

Analyze Option D (for completeness)

Option D states that M1 money supply consists of Federal Reserve notes and bank loans. Bank loans are not considered a part of M1 money supply since they do not represent a liquid, transactional form of money. Therefore, option D is not correct. In conclusion, the correct answer is:

Answer

The M1 definition of the money supply consists of coins and currency in circulation, checkable deposits, and traveler's checks (Option B).

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