Final answer:
M2 is a broader measure of money supply that includes everything in M1 and adds other types of deposits, such as savings accounts, time deposits, and money market mutual fund balances. It represents a slightly less liquid form of money compared to M1.
Step-by-step explanation:
M2 refers to a broader definition of money that includes everything in M1 but also adds other types of deposits. It represents a measure of the money supply in an economy. For example, M2 includes savings deposits in banks, time deposits, and individual money market mutual fund balances.
M2 also includes certificates of deposit (CDs) or time deposits, which are accounts where the depositor commits to leaving the money in the bank for a specific period of time. These accounts offer a higher interest rate in exchange for a longer commitment. M1 is a subset of M2, as it includes currency, demand deposits (checking accounts), and traveler's checks.
Overall, M2 represents a broader measure of money that includes various forms of deposits and is slightly less liquid compared to M1.