Which statement about M1 and M2 is correct?

Which statement about M1 and M2 is correct?

• A. M1 is the broadest measure; M2 is narrower.
• B. M1 includes near money; M2 is currency only.
• C. M1 is the narrowest definition of money; M2 includes M1 plus near money.
• D. M2 excludes checkable deposits.

Answer: (C)

Money is grouped by liquidity, meaning how quickly and easily it can be used for transactions. M1 contains the most liquid forms: currency in circulation and checkable (demand) deposits. M2 expands on that by adding near money—assets that aren’t cash but can be converted to cash quickly with little loss of value, such as savings deposits and small-denomination time deposits, along with certain money market instruments. Because of this, M1 is the narrowest money measure, and M2 is M1 plus near money. The other descriptions either treat M2 as currency-only, claim M1 is the broadest, or say M2 excludes checkable deposits—none of which align with how these aggregates are defined.

Money is grouped by liquidity, meaning how quickly and easily it can be used for transactions. M1 contains the most liquid forms: currency in circulation and checkable (demand) deposits. M2 expands on that by adding near money—assets that aren’t cash but can be converted to cash quickly with little loss of value, such as savings deposits and small-denomination time deposits, along with certain money market instruments. Because of this, M1 is the narrowest money measure, and M2 is M1 plus near money. The other descriptions either treat M2 as currency-only, claim M1 is the broadest, or say M2 excludes checkable deposits—none of which align with how these aggregates are defined.