Categorize the following as components of M1, M2, both, or...

Categorize the following as components of $M_1, M_2$, both, or neither.
a. State and local government bonds.
b. Checking accounts.
c. Money market mutual funds.
d. Currency.
c. Stocks.
f. Corporate bonds.
g. Traveler's checks. LO5

Key Concepts

M1 Money Supply

This concept refers to the most liquid components of the money supply. M1 typically includes currency in circulation, checking accounts, and traveler's checks. It represents money that is readily available for transactions and day?to-day expenditures, making it the most accessible form for immediate spending.

M2 Money Supply

M2 expands on M1 by including assets that are slightly less liquid. It encompasses all of M1 plus savings accounts, small-denomination time deposits, and money market mutual funds. Although these assets are not as easily spendable as those in M1, they can be converted into cash relatively quickly and thus form a broader measure of the money supply.

Classification of Financial Assets

This concept involves understanding which financial instruments are considered part of the money supply and which are not. Instruments such as stocks and bonds (including state and local government bonds and corporate bonds) are typically not counted as money, because they represent investments or claims on future income rather than immediately spendable funds. Their inclusion in measures of money supply would distort the understanding of liquidity in an economy.

Liquidity

Liquidity refers to the ease with which an asset can be converted into cash without a significant loss in value. Liquid assets, like those in M1, can be readily used for transactions, whereas assets in M2, while less liquid than M1 components, can still be converted into cash with some effort. This concept is essential for differentiating between various forms of money and understanding the overall money supply.

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