Question

Which of the Federal Reserve’s measures of the monetary aggregates—M1 or M2—is composed of the most liquid assets? Which is the larger measure?

Short answer

M1 is the most liquid and M2 is the larger measure of money supply.

Step-by-step solution

Step 1. Introduction

The money supply is the entire amount of money in circulation, including cash, coins, and bank account balances. The money supply is typically characterized as a collection of safe assets that people and companies can use to make payments or invest in the short term.

Step 2. Explanation

Cash is commonly regarded as the most liquid asset. A bank transfer or an ATM withdrawal can swiftly and simply access cash in a bank or credit union account. M1 is the most the liquid asset and M2 is the larger measure of money supply because it comprises highly liquid assets that aren't cash.