Final Answer:
M1, a narrower definition of money, includes highly liquid assets like physical currency and demand deposits. In contrast, M2 is broader, encompassing M1 and less liquid assets. Despite being smaller, M1 is more liquid due to its focus on easily accessible forms of money, while M2, though larger, includes assets with limitations on immediate withdrawal. So, the correct option is c. m1 is smaller but more liquid than m2.
Step-by-step explanation:
The correct option is c. m1 is smaller but more liquid than m2. M1 and M2 are classifications of money supply, each encompassing different forms of currency and financial instruments. M1 is the more narrow measure, including the most liquid forms of money such as physical currency in circulation and demand deposits. Demand deposits are funds held in checking accounts that can be easily accessed for transactions. Despite its smaller scope, M1 is considered more liquid as it represents assets readily available for day-to-day transactions.
On the other hand, M2 is a broader measure that includes all components of M1 but also incorporates less liquid assets like savings accounts, time deposits, and other near-money assets. These additional components make M2 a larger measure of the money supply, but it is considered less liquid compared to M1 due to the inclusion of assets that may have restrictions on immediate withdrawal.
In summary, the key distinction lies in liquidity and scope. M1 is smaller but more liquid, focusing on the most easily accessible forms of money. In contrast, M2 is larger but less liquid, encompassing a broader range of assets that may not be as readily available for immediate transactions.