Chapter 5R, Problem 11MCQ

To determine

The correct option that defines the M1 money supply.

Answer to Problem 11MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

M1 supply is a narrower concept that includes only cash and checking deposits. The M1 supply of money is more liquid as compared to the M2 money supply. Therefore, option b is correct.

Explanation for incorrect options:

a.

Near money includes savings and time deposits with banks or other institutions. This falls under the M2 money supply category. Therefore, option a is incorrect.

c.

Saving deposits are less liquid as compared to cash or checking deposits. So, they fall under M2 supply. Therefore, option c is incorrect.

d.

Time deposits are less liquid as compared to cash or checking deposits. So, they fall under M2 supply. Therefore, option d is incorrect.

e.

Mutual funds are more illiquid in nature due to which they fall under the M2 money supply category. Therefore, option e is incorrect.

Economics Concept Introduction

Characteristics of money: Main characteristics of money refer to the traits that money should possess which include durability, being portable, divisible, uniform, and acceptable, and has limited supply.

M1 money supply: M1 money supply considers only cash and checking deposits whereas M2 is the broader aspect of money supply that includes time deposits, money market securities, etc.