Chapter 14: Problem 10

What components of money do we count as part of M1?

Short Answer

Expert verified

M1 is a measure of the money supply that includes the most liquid forms of money, such as currency, demand deposits, other checkable deposits (OCDs), and traveler's checks. These components are essential for daily transactions and can be easily accessed by individuals and businesses.

Step by step solution

Define M1

M1 is a measure of the money supply that includes the most liquid forms of money. It represents money that people can access quickly and easily for transactions, thus allowing them to purchase goods and services.

Discuss Currency

Currency is counted as part of M1 and includes physical money like coins and paper notes. Currency is the primary medium of exchange in an economy and is easily accessible and accepted for transactions.

Discuss Demand Deposits

Demand deposits are also included in M1. Demand deposits are checking accounts in banks and other financial institutions. These deposits can be easily accessed and withdrawn by account holders through checks, debit cards, or ATMs without the need for prior notice or waiting period.

Include Other Checkable Deposits

Other checkable deposits, or OCDs, are also part of M1. These are the accounts in banks, credit unions, or other financial institutions that allow depositors to write checks against their account balances as another way to make transactions. OCDs are similar to demand deposits and are also considered liquid funds.

Highlight Traveler's Checks

Lastly, traveler's checks are included in M1. Traveler's checks are secured documents issued by financial institutions which can be easily converted into cash and used for transactions when individuals are traveling. They provide a convenient and secure way to carry money, but their use has declined in recent years with the increased availability of credit cards and electronic payments. In conclusion, M1 is a measure of the most liquid forms of money, and it includes currency, demand deposits, other checkable deposits, and traveler's checks. These components are commonly used in daily transactions and can be easily accessed by individuals and businesses.