Which asset is included in M2 but not in M1?

Which asset is included in M2 but not in M1?

• A. Currency in circulation
• B. Checkable deposits
• C. Travelers checks
• D. Time deposits like CDs

Answer: (D)

Monetary aggregates distinguish money by how liquid it is. M1 includes the most liquid forms you can spend on the spot: currency in circulation and checkable deposits, plus traveler's checks. M2 expands that with assets that are not as instantly spendable but can be quickly converted to cash, such as small-denomination time deposits like certificates of deposit, along with savings deposits and retail money market instruments. Because time deposits require locking up funds for a term and often impose penalties for early withdrawal, they aren’t part of M1, but they are included in M2. So the asset that sits in M2 but not in M1 is time deposits like CDs. The other options are part of M1 due to their high liquidity: currency in circulation, checkable deposits, and traveler's checks are all readily spendable.

Monetary aggregates distinguish money by how liquid it is. M1 includes the most liquid forms you can spend on the spot: currency in circulation and checkable deposits, plus traveler's checks. M2 expands that with assets that are not as instantly spendable but can be quickly converted to cash, such as small-denomination time deposits like certificates of deposit, along with savings deposits and retail money market instruments. Because time deposits require locking up funds for a term and often impose penalties for early withdrawal, they aren’t part of M1, but they are included in M2. So the asset that sits in M2 but not in M1 is time deposits like CDs. The other options are part of M1 due to their high liquidity: currency in circulation, checkable deposits, and traveler's checks are all readily spendable.