Question

Which of these forms of money are included in \(\mathrm{M} 1\): \(\bullet\)checking accounts \(\bullet\)coins \(\bullet\)money market accounts \(\bullet\)paper money \(\bullet\)savings accounts \(\bullet\)time deposits \(\bullet\)traveler's checks \(\bullet\)NOW accounts

Short answer

Included in M1: checking accounts, coins, paper money, traveler's checks, and NOW accounts.

Step-by-step solution

Identify M1 components

M1 is a measure of the money supply that includes the most liquid and widely used forms of money. The components are typically coins, paper money, demand deposits, and other checkable deposits such as checking accounts, NOW accounts, and traveler's checks.

Evaluate each form of money

Examine each form of money in the list: - Checking accounts are included in M1 because they are checkable deposits. - Coins are part of M1 as physical currency. - Money market accounts are not included in M1 as they are not as liquid as the components of M1. - Paper money is included in M1 as it is physical currency in circulation. - Savings accounts are not included in M1 since they are less liquid. - Time deposits are also not included in M1 because they are not readily available without penalty. - Traveler's checks are included in M1 as they are liquid and can be used for transactions. - NOW accounts are included in M1 as they are checkable deposits.

Select included forms

The forms of money included in M1 from the list are checking accounts, coins, paper money, traveler's checks, and NOW accounts.

Key concepts

Liquidity

Liquidity refers to how quickly and easily an asset can be converted into cash without losing value. In the world of finance, liquidity is crucial because it determines the ease with which you can access your money.
When it comes to the money supply, liquidity is paramount. Liquid forms of money, like checking accounts and cash, allow individuals and businesses to perform daily transactions smoothly. Liquidity is a key factor in determining what is included in M1, the most immediate form of money supply.
M1 consists of extremely liquid assets, meaning they can be readily used for spending. Higher liquidity forms of money are used in the evaluation of M1 because they ensure economic stability and ease of trade.

Checking Accounts

Checking accounts are a highly liquid component of M1 because they allow for easy access to funds. They are maintained at commercial banks and provide the convenience of using checks or debit cards for transactions.
Instead of carrying cash, individuals can utilize their checking accounts to make purchases, pay bills, and transfer money. The funds in checking accounts are available on demand, which means you don't have to wait to access your money.
Moreover, checking accounts often come with added features like online banking, making it even more convenient to manage money. Their immediate accessibility makes them a vital part of the M1 money supply.

Traveler's Checks

Traveler's checks are another element of M1 due to their liquidity and reliability. Although they are less common now, they historically served as a safe way to carry money while traveling.
Issued mainly by banks and credit card companies, traveler's checks allow you to make payments anywhere in the world without worrying about exchange rates or stolen cash. They offer a secure payment method because each check bears a unique serial number and requires a signature for transaction authorization.
While digital methods of payment have overtaken them, traveler's checks are still included in M1 as they can be quickly converted into cash or used in transactions globally.

Currency

Currency in the context of M1 refers to the physical forms of money such as coins and paper money. Currency is one of the most liquid forms of money and a core component of M1.
The distinct feature of currency is its immediate acceptance in transactions. Whether it's paying for groceries or settling debts, currency is universally recognized and accepted. It serves as a tangible and direct representation of value, facilitating trade in everyday life.
Currency holds importance in the economy not only because it enables transactions but also because it is easy to store and transport. This usability makes it an essential part of M1, ensuring that the economy functions smoothly by facilitating direct exchange of goods and services.