What does M2 encompass in addition to what M1 includes?

What does M2 encompass in addition to what M1 includes?

• A. Only cash in hand
• B. Savings and money market mutual funds
• C. Time deposits only
• D. Investment portfolios

Answer: (B)

The correct answer is B because M2 is a broader category of the money supply that includes everything in M1 plus additional forms of liquid assets. M1 consists primarily of physical currency and demand deposits, meaning that it covers cash in hand and checking accounts. M2 expands upon this by incorporating savings accounts, money market mutual funds, and other near-money assets that can easily be converted into cash. This means that M2 provides a more comprehensive view of the total money supply available in an economy by not only including cash and checking deposits but also these additional types of savings vehicles, which can be quickly accessed or liquidated for spending. Understanding M2 and its components is crucial for analyzing monetary policy and economic health.

The correct answer is B because M2 is a broader category of the money supply that includes everything in M1 plus additional forms of liquid assets. M1 consists primarily of physical currency and demand deposits, meaning that it covers cash in hand and checking accounts. M2 expands upon this by incorporating savings accounts, money market mutual funds, and other near-money assets that can easily be converted into cash. This means that M2 provides a more comprehensive view of the total money supply available in an economy by not only including cash and checking deposits but also these additional types of savings vehicles, which can be quickly accessed or liquidated for spending. Understanding M2 and its components is crucial for analyzing monetary policy and economic health.