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What is the main difference between the M1 and M2 definitions of the money supply? Why...

What is the main difference between the M1 and M2 definitions of the money supply?
Why does the Federal Reserve use two definitions of the money supply rather than one?
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Answer #1

The M1 includes an only the most liquid form of money. it includes the currency, demand deposits or checkable deposits and traveler checks.

M2 includes the M1 plus time deposits and money market mutual form. The M2 is less liquid as opposed to the M1 measurement.

Federal Reserve tends to release the data concerning the M1 and M2 to measure the exact level of money supply and quantity of liquidity in the economy. Fed forms its policies based on these measurements.

both measures serves the two different purposes.

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