Which statement correctly describes the relationship between M1 and M2?

Which statement correctly describes the relationship between M1 and M2?

• A. M1 is the broadest measure; M2 includes near money.
• B. The two are the same measure.
• C. M1 includes currency and checkable deposits; M2 includes M1 plus near money.
• D. M2 excludes near money.

Answer: (C)

Understanding monetary aggregates: M1 measures the money most readily used for transactions, consisting of currency in circulation and checkable deposits. M2 broadens that concept by adding near money—assets that can be quickly converted into cash but aren’t used directly for transactions, such as savings deposits, small denomination time deposits, and retail money market funds. So the correct description is that M1 includes currency and checkable deposits, and M2 equals M1 plus near money. The other statements don’t fit because M1 is not the broadest measure, the two are not the same, and M2 does include near money.

Understanding monetary aggregates: M1 measures the money most readily used for transactions, consisting of currency in circulation and checkable deposits. M2 broadens that concept by adding near money—assets that can be quickly converted into cash but aren’t used directly for transactions, such as savings deposits, small denomination time deposits, and retail money market funds. So the correct description is that M1 includes currency and checkable deposits, and M2 equals M1 plus near money. The other statements don’t fit because M1 is not the broadest measure, the two are not the same, and M2 does include near money.