Money Supply: Understanding M1 Measure

What does the M1 measure of the money supply consist of?

Choose the correct option:

A. Paper money plus coins in circulation.

B. Currency plus checking account balances.

C. Currency plus checking account balances plus traveler's checks.

D. Currency plus checking account balances plus traveler's checks plus savings account balances.

Answer:

The M1 measure of money supply includes currency, checking account balances, and traveler's checks. It does not include savings account balances as they are part of the M2 money supply measure.

The M1 measure of the money supply is defined as the total amount of monetary assets available in an economy at a specific time. In economic terms, option C is correct. The M1 measure includes currency (paper money and coins), checking account balances, and traveler's checks. Savings accounts are not included because they are considered less liquid and are part of the larger M2 money supply measure.

The M1 measure is used by economists as an indicator of an economy's liquidity and spending power. It helps in analyzing the availability of cash and liquid assets that can be used for transactions. Understanding the components of the M1 measure is essential in assessing the financial health of an economy and making informed decisions.