What is the difference between M1 and M2 money supply?

What is the difference between M1 and M2 money supply?

• A. M1 includes the most liquid money (currency, coins, checkable deposits, traveler's checks); M2 includes M1 plus near-money assets like savings deposits, money market funds, and small-time deposits.
• B. M1 includes only cash; M2 includes only savings.
• C. M2 includes only government securities; M1 includes all money.
• D. M1 and M2 are identical definitions.

Answer: (A)

The difference is about liquidity and breadth. M1 is the most liquid money you can use directly for transactions: currency in circulation, coins, checkable (demand) deposits, and traveler's checks. M2 broadens that view to include near-money assets that aren’t spending immediately but can be converted to cash fairly easily: savings deposits, small-denomination time deposits, money market deposit accounts, and retail money market mutual funds. So M2 equals M1 plus these near-money assets. The choice that states M1 is the most liquid money and M2 adds near-money assets like savings deposits, money market funds, and small-time deposits is the correct description. The other options misstate what’s included in M1 or M2 or claim they’re the same.

The difference is about liquidity and breadth. M1 is the most liquid money you can use directly for transactions: currency in circulation, coins, checkable (demand) deposits, and traveler's checks. M2 broadens that view to include near-money assets that aren’t spending immediately but can be converted to cash fairly easily: savings deposits, small-denomination time deposits, money market deposit accounts, and retail money market mutual funds. So M2 equals M1 plus these near-money assets. The choice that states M1 is the most liquid money and M2 adds near-money assets like savings deposits, money market funds, and small-time deposits is the correct description. The other options misstate what’s included in M1 or M2 or claim they’re the same.