Question

M1 differs from M2 because ________. A) M1 is less liquid than M2 B) M1 includes demand deposits and M2 does not C) M1 includes only the most liquid forms of money and M2 includes all of M1 and some less liquid items D) all of the above E) none of the above

Answer 1

M1 money supply includes the most liquid forms of money like cash, demand deposits, travellers check etc, whereas M2 money supply includes all of M1 plus other less liquid items like certificate of deposits, savings and time deposits etc. This means that M2 is less liquid than M1.

A). This option is incorrect, as M1 is more liquid than M2 as M1 consists of the most liquid forms of money as we have discussed above.

B). This option is incorrect, as M2 includes all of M1 so M2 also includes demand deposits.

C). We have discussed above that M1 includes the most liquid forms of money and M2 includes M1 plus other less liquid items. Hence, this option is the correct answer.

Options D and E both are incorrect Options.