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Defining the Money Supply: M1 and M2 quiz

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  • What is the main difference between M1 and M2 in the money supply?
    M1 includes highly liquid assets like currency, demand deposits, and savings, while M2 includes all of M1 plus less liquid assets such as money market funds and certificates of deposit.
  • How do economists define liquidity in the context of money?
    Liquidity refers to how quickly and easily an asset can be converted into cash or spent.
  • Which types of assets are considered the most liquid in the money supply?
    Currency (cash), demand deposits, and savings are considered the most liquid assets.
  • What types of assets are included in M1?
    M1 includes currency, demand deposits, and savings accounts.
  • What additional assets are included in M2 that are not in M1?
    M2 includes all of M1 plus money market funds and certificates of deposit (CDs).
  • Why are money market funds considered less liquid than currency?
    Money market funds are less liquid because it may take a few days to convert them into cash.
  • What is a certificate of deposit (CD) and why is it less liquid?
    A CD is a time deposit with a maturity date, and you must wait until maturity to access the funds, making it less liquid.
  • How has the classification of savings accounts changed in recent years?
    Savings accounts have shifted from being part of M2 to being included in M1 due to the rise of online banking.
  • Why did the classification of savings accounts change from M2 to M1?
    The change occurred because online banking made savings accounts more accessible and liquid.
  • If someone says they are 'not very liquid,' what do they mean?
    They mean they do not have much cash or easily spendable money available.
  • How does liquidity affect economic transactions?
    Higher liquidity makes it easier to conduct transactions, influencing supply and demand dynamics.
  • What does M2 include that M1 does not?
    M2 includes money market funds and certificates of deposit in addition to all assets in M1.
  • How might using an old textbook affect your understanding of the money supply?
    Old textbooks may list savings accounts as part of M2, not M1, which is outdated due to recent changes.
  • Why is understanding liquidity important in economics?
    Understanding liquidity helps explain how assets facilitate transactions and impact market equilibrium and economic profits.
  • What is the relationship between M1 and M2?
    M2 contains all the assets in M1 plus additional, less liquid assets.