M1 Money Supply

• Definition: M1 includes the most liquid forms of money, which can be quickly and easily used for transactions.
• Components:
  • Physical Currency: Coins and paper money held by the public.
  • Demand Deposits: Checking accounts at banks.
  • Other Checkable Deposits: Includes negotiable order of withdrawal (NOW) accounts and automatic transfer service (ATS) accounts.
  • Traveler’s Checks: Although less common now, they are still included in M1.

M1 is often referred to as “narrow money” because it focuses on the most liquid assets that can easily be used for spending.

M2 Money Supply

• Definition: M2 includes all the components of M1, plus additional forms of money that are less liquid and not as easily converted into cash.
• Components:
  • All of M1: As defined above.
  • Savings Deposits: Accounts that are interest-bearing, such as savings accounts.
  • Time Deposits: Certificates of deposit (CDs) under a certain amount (typically less than $100,000).
  • Money Market Deposit Accounts: Accounts that pay interest and have limited transaction privileges.
  • Retail Money Market Mutual Funds: Mutual funds that invest in short-term, high-quality investments, typically considered safe.

M2 is sometimes referred to as “broad money” because it includes a wider range of financial assets than M1.