Question

Identify whether each of the following examples belongs to Money aggregates (M1 or M2). If an example belongs in both, be sure to write it down.
a. Sean has $30,000 in a money market account.
b. Musashi has a roll of quarters that he just withdrew from the bank to do laundry.
c. Yvette has $7,000 in a two-year certificate of deposit (CD).

Any type of money that falls into the M2 category is, by definition, part of M1 as well.

a. True
b. False

Answer 1

Answer: 1. a) M2

b) M1 and M2

c) M2

2. b. False

Explanation:

1.

M1 is a type of definition of money by economists that seek to explain the circulation of money in the economy. It includes cash and cash equivalents that are easy to convert into cash. This includes actual physical cash as well as Demand Deposits.

M2 is the definition that follows after M1. M2 by definition includes all the types of cash in M1 as well as deposits less than $100,000, non Institutional Money Market Fund investments and savings deposits. It isn't as liquid as M1 but is very important in forecasting inflation.

The classifications therefore are,

a) M2. This is M2 as it is a Non Institutional Money Market investment by Sean.

b) M1 and M2. This is physical cash and as such is part of M1 and as stated, anything part of M1 is part of M2 as well.

c) M2. As a deposit less than $100,000, the $7,000 that Yvette has in the CD classifies as M2.

2. False.

Money that is part of M2 is not automatically part of M1. M1 includes only physical cash as well as Demand Deposits while M2 has other forms such as savings deposits and small time deposits. Money that is part of M1 is automatically part of M2 and not the other way around.