Correct Answer: the sum of coins, currency, demand deposits and savings accounts and small-denomination time deposits
the money supply in an economy is measured using various aggregates, each capturing different components of the total money available in the economy. one of these measures is m-2, which is broader than m-1 and includes additional forms of money. understanding the composition of these measures is crucial for analyzing economic health and making informed financial and policy decisions.
m-2 is an important measure of the money supply because it encompasses types of money that are less liquid than those included in m-1 but still significant for economic activities. specifically, m-2 includes everything in m-1 plus several other types of financial assets. m-1, the more narrow measure, consists of coins, currency (paper money), and demand deposits (the balances in checking accounts and other accounts that can be accessed on-demand without restrictions).
expanding further, m-2 includes all the components of m-1 and adds savings accounts, small-denomination time deposits (such as certificates of deposit under $100,000), and balances in retail money market mutual funds. the inclusion of these additional components makes m-2 a broader measure, reflecting forms of money that are not used as medium of exchange but rather as a store of value. these additional components are less liquid than those in m-1, meaning they cannot be as quickly converted into cash or used for transactions.
therefore, when analyzing the question of what m-2 refers to, the correct answer is: m-2 refers to the sum of coins, currency, demand deposits, savings accounts, and small-denomination time deposits. this broader measure helps economists and policymakers gauge the overall liquidity available in the economy beyond immediate spending needs, which is crucial for understanding economic conditions and guiding monetary policy.
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