Final Answer:
(a) M1 includes currency, demand deposits, and other liquid assets, while M2 encompasses M1 plus additional near-money assets like savings accounts and small time deposits. (b) Economists use these categories to analyze and understand the different levels of liquidity and the overall money supply in an economy.
Step-by-step explanation:
(a) M1 includes the most liquid forms of money that are readily accessible for transactions, such as physical currency (coins and bills) and demand deposits in banks. M2 expands on M1 by incorporating near-money assets—assets that can be quickly converted to cash or used for transactions—such as savings accounts and small time deposits.
(b) Economists use these different categories to gain insights into the money supply and its various components. M1 and M2 help measure the levels of liquidity within an economy, providing a nuanced understanding of the availability of money for spending, investment, and overall economic activity.