Question

Explain the differences between M1 and M2 money supply and why it is important to know the differences.

Answer 1

M1 and M2 both are the representations of money. M1 is physical money supply. it includes the following: cash, coins, demand deposits , checking accounts and travellers's checks. M1 is easy to understand because of its ease and quickness of transfer from accounts and assets to physical currency.

M2 includes near money concept . It is the broader concept of money supply. It includes savings deposits, money mutual funds and other time deposits and also cash amd checking deposits. It is important to understand because it can often serve as a legitimate way to invest, increase wealth etc.

M1 is more limited and more liquid . M2 includes more types of money but are less liquid.

it is important to know the differences because of their liquidity.