Question

The chief difference between the M1 and M2 definitions of the money supply is:

A) M1 exceeds M2.
B) M2 excludes traveler's checks.
C) M1 is a narrower, less comprehensive measure.
D) M2 includes assets that are more liquid than those in M1.

Answer 1

(C) M1 is a narrower, less comprehensive measure

Step-by-step explanation:

In defining money supply,

M1 refers to coins and notes currencies in circulation.

M2 refers to coins and notes currencies, as well as short-term deposits with banks.

In essence, beyond the cash held by the populace in their wallets, M2 includes the balances in their bank accounts and is thus a wider definition of money supply.

Accordingly, M1 is a narrower, less comprehensive measure of money supply.

Option (A) is incorrect because M2 exceeds M1, not the other way around. Option (B) is incorrect because M2 will necessarily include traveler's check since they are used in place of cash by travelers and M2 includes cash. Option (D) is incorrect because M1 include assets that are more liquid than M2.