AP Macroeconomics Question 46: Answer and Explanation

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Question: 46

8. A difference between M1 and M2 is that

  • A. M1 is a first mortgage and M2 is a second mortgage
  • B. M2 is M1 plus assets that are more liquid
  • C. M2 includes savings deposits
  • D. M1 is larger than M2
  • E. M2 is always double M1

Correct Answer: C

Explanation:

C M1 and M2 are different but overlapping measures of the money supply. M1 is the sum of currency, checking deposits, and travelers' checks. M2 is M1 plus savings deposits and some other less-liquid assets. Because M1 is part of M2, M1 cannot be larger than M2. At the same time, there is no reason why M2 would always be double M1.