Unformatted text preview: Our textbook says that what people believe is money and what people will accept as money are determining factors n deciding whether a financial asset is money. Because that can be ambiguous, economists have developed different measures of money. M1 consists of currency in the hands of the public. Such as cash & coins, checking account balances and traveler’s checks. If it looks like money, acts like money, and functions as money, it’s a good bet it’s money. M2 is made up of M1 PLUS savings deposits, small-denomination time deposits (CDs), and money market mutual fund shares. M2’s components include more financial assets than M1. All components are highly liquid and play an important role in providing reserves and lending capacity for banks. But what makes the M2 measure important is that economic research has shown that M2 is the measure of money often most closely correlated with the price level of economic activity. Page 1 of 1...
View Full Document
- Fall '09
- Economics, Deposit account, Don Uhrig