Money And The Federal Reserve Practice Exam

The idea being tested is how money supply is defined and how M1 and M2 differ in liquidity. M1 is the money that’s most readily usable for transactions: currency in circulation plus checkable deposits (like demand and other on-demand accounts). M2 broadens that measure by including M1 plus near‑money assets that can be quickly converted to cash, such as savings deposits, small-denomination time deposits, and other near‑money assets. So the best description is that M1 equals currency in circulation plus checkable deposits, while M2 includes M1 plus savings deposits, small time deposits, and other near-money assets. The other options miss or misstate parts of this: one is incomplete because it leaves out the broader M2; another says M2 is just currency in circulation; and another incorrectly says M1 includes savings deposits.