M1
M1 is the money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash. However, "near money" and "near, near money," which fall under M2 and M3, cannot be converted to currency as quickly.
Definition:
M1 is the money supply that includes currency, demand deposits, and other liquid deposits (including savings deposits). M1 represents the most liquid portion of the money supply because it includes cash and assets that can be quickly converted to cash. However, 'near money' and 'near-near money,' which belong to M2 and M3, cannot be converted to cash as quickly as M1.
Origin:
The concept of M1 originated in the early 20th century when economists and financial institutions began to focus on the impact of money supply on economic activity. Over time, the definition of M1 became clearer and it became an important indicator for measuring money supply and liquidity.
Categories and Characteristics:
M1 mainly includes the following categories:
1. Currency: Includes paper money and coins, which are the most direct means of payment.
2. Demand Deposits: Bank deposits that can be withdrawn at any time, usually used for daily transactions.
3. Other Liquid Deposits: Includes savings deposits that can be quickly converted to cash.
Characteristics:
- High Liquidity: Assets in M1 can be quickly converted to cash for payments and transactions.
- Low Yield: Due to high liquidity, assets in M1 usually have lower returns.
Specific Cases:
Case 1:
John has a demand deposit in a bank, which he can withdraw at any time for daily expenses. This demand deposit is part of M1 because it has high liquidity.
Case 2:
A company has a savings deposit in a bank, which can be converted to cash in a short period for paying employee salaries and daily operations. This savings deposit is also part of M1 because it can be quickly converted to cash.
Common Questions:
1. Why does M1 have high liquidity?
Answer: Because M1 includes cash and assets that can be quickly converted to cash, such as demand deposits and savings deposits.
2. What is the difference between M1 and M2?
Answer: M1 includes the most liquid assets, while M2 includes M1 and other less liquid assets, such as time deposits and money market funds.
