The M1 definition of the money supply used by the government includes: currency and demand deposits (checking/debit accounts). savings accounts and money market deposits. money market mutual funds and small time deposits. total bank deposits and mutual fund balances.
The Correct Answer and Explanation is:
Correct Answer:
Currency and demand deposits (checking/debit accounts).
Explanation
The M1 definition of the money supply represents the most liquid components of the money supply—those that are readily available for spending and payment of goods and services. According to the United States Federal Reserve and many standard macroeconomics textbooks, M1 includes:
- Currency in circulation: This refers to physical money such as coins and paper bills held by the public (outside of banks).
- Demand deposits: These are checking account balances that can be accessed on demand via checks, debit cards, or electronic transfers.
- Other checkable deposits (OCDs): These include negotiable order of withdrawal (NOW) accounts and automatic transfer service (ATS) accounts.
- Traveler’s checks (issued by non-bank institutions): Though declining in use, they are still formally included.
M1 does not include savings accounts, money market deposit accounts, or time deposits, as these are considered slightly less liquid and are part of M2, a broader measure of the money supply. For example, savings accounts typically have restrictions on the number of withdrawals per month and are not designed for regular transactions. Likewise, money market mutual funds and small time deposits (certificates of deposit under $100,000) are included in M2 because they can be relatively quickly converted into cash, but not instantly used for everyday transactions like M1 components.
Understanding M1 is essential in monetary policy and economic analysis because it reflects the portion of the money supply most directly involved in everyday spending and consumption. Central banks monitor M1 closely when assessing the economy’s liquidity and making decisions about interest rates and inflation control.
In summary, M1 is strictly limited to money that can be used immediately for transactions—namely, currency and demand deposits—making it the narrowest and most liquid measure of money.
