Final Answer:
The composition of the U.S. money supply in 2017, as depicted in Figure 15-2, shows that M1 primarily consists of currency in circulation and demand deposits, while M2 includes M1 along with savings deposits, small time deposits, and retail money market mutual funds.
Step-by-step explanation:
M1 Composition:
The figure illustrates that M1 comprises currency in circulation and demand deposits. This means that M1 includes physical currency actively used in transactions and funds held in easily accessible demand deposit accounts.
M2 Composition:
In contrast, M2 encompasses a broader range. It includes all components of M1 but goes further to include savings deposits, small time deposits, and retail money market mutual funds. This implies that M2 covers not only liquid forms of money but also various types of savings and time-based deposits.
Currency in Circulation:
Currency in circulation refers to the total value of physical currency (coins and paper money) that is outside of the banking system and in the hands of the public.
Demand Deposits:
Demand deposits represent funds held in accounts that allow for withdrawals at any time, such as checking accounts.
Savings Deposits and Time Deposits:
Savings deposits are accounts with a focus on saving rather than frequent transactions, while time deposits involve fixed-term deposits, often with higher interest rates.
Retail Money Market Mutual Funds:
This component includes money market mutual funds that primarily invest in short-term, highly liquid instruments.