In the United States, the money supply (m1) consists of
The Correct Answer and Explanation is:
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Correct Answer:
In the United States, the money supply (M1) consists of currency in circulation, demand deposits, traveler’s checks, and other checkable deposits.
Explanation
The money supply is a critical economic indicator that reflects the total amount of monetary assets available in an economy at a specific time. In the United States, the Federal Reserve, which is the central bank, defines the money supply using several categories, the most common of which are M1 and M2.
M1 is the narrowest and most liquid measure of the money supply. It includes:
- Currency in circulation: This refers to physical money such as coins and paper bills that are in the hands of the public, not held by banks or the government.
- Demand deposits: These are funds held in checking accounts that can be accessed on demand through checks or electronic transfers.
- Traveler’s checks: Though now rarely used, these are preprinted, fixed-amount checks designed to allow travelers to make payments in foreign countries with reduced risk of loss or theft.
- Other checkable deposits (OCDs): These include negotiable order of withdrawal (NOW) accounts and automatic transfer service (ATS) accounts. Like demand deposits, OCDs can be accessed easily and used for transactions.
These components share one key characteristic: they are highly liquid, meaning they can be quickly and easily used for transactions without losing value.
M1 is a central measure for economists and policymakers because it reflects the immediate spending capacity within the economy. An increase in M1 typically signals that consumers and businesses have more access to cash or cash-equivalent funds, which can lead to increased spending, investment, and potentially inflation if not matched by growth in goods and services.
In contrast, M2 includes all of M1 plus “near money” like savings deposits, money market securities, and time deposits, which are less liquid. However, M1 remains the best indicator of funds that are readily available for day-to-day economic transactions.
