Question

M1 and M2 are two definitions of the money supply. Determine whether the items listed are included in the money supply under each of these definitions.

a. Common stock is part of _______________.
b. Money market account balances are part of _______________.
c. Balances in savings accounts are part of _______________.
d. Balances on checking accounts are part of _______________.
e. Certificates of deposit are part of _______________.
f. Currency is part of _______________.
g. Credit cards are part of _______________.
h. Gold is part of _______________.

WORD BANK:
- M1 only.
- both M1 and M2.
- M2 only.
- neither M1 or M2.

Answer 1

Answer:

a. Common stock is part of neither M1 or M2.

b. Money market account balances are part of M2 only.

c. Balances in savings accounts are part of M2 only.

d. Balances on checking accounts are part of both M1 or M2.

e. Certificates of deposit are part of M2 only.

f. Currency is part of both M1 or M2.

g. Credit cards are part of neither M1 or M2.

h. Gold is part of neither M1 or M2.

Explanation:

M1 is the narrower of the two definitions and includes only the most liquid types of money such as currency, traveler's checks, and balances in checking accounts. M1 is physical money supply that includes cash, coins, demand deposits, etc. It is also know as liquidity.

M2 includes all M1 plus near money such as savings deposit, money mutual fund and other time depositthat are less liquid and not easily transferrable to physical money. M2 is a broader definition. M2 includes M1, certificates of deposit, money market account balances, and savings account balances.