Measuring Money: Currency, M1, and M2

Self-Check Questions

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

Hint:

The currency and checks in M1 are easiest to spend. It is harder to spend M2 directly, although if there is an automatic teller machine in the shopping mall, you can turn M2 from your savings account into an M1 of currency quite quickly. If your answer is about “credit cards,” then you are really talking about spending M1—although it is M1 from the account of the credit card company, which you will repay later when you credit card bill comes due.

For the following list of items, indicate if they are in M1, M2, or neither:

  1. Your $5,000 line of credit on your Bank of America card
  2. $50 dollars’ worth of traveler’s checks you have not used yet
  3. $1 in quarters in your pocket
  4. $1200 in your checking account
  5. $2000 you have in a money market account

Hint:

  1. Neither in M1 or M2
  2. That is part of M1, and because M2 includes M1 it is also part of M2
  3. Currency out in the public hands is part of M1 and M2
  4. Checking deposits are in M1 and M2
  5. Money market accounts are in M2