Money Supply: What's included in the narrowest definition?

Which of the following are included in the narrowest definition of the money supply?

A) cash in bank vaults
B) savings deposits
C) money market mutual fund accounts
D) negotiable certificates of deposit
E) checkable deposits

Answer:

The items included in the narrowest definition of the money supply, known as M1, are cash in bank vaults and checkable deposits (option A & E).

M1 is considered the narrowest definition of the money supply as it comprises the most liquid forms of money that can be used for transactions. Cash in bank vaults refers to physical currency held by banks, while checkable deposits are funds that can be withdrawn by check or debit card. These forms of money are easily accessible for transactions and are hence included in M1.

On the other hand, savings deposits, money market mutual fund accounts, and negotiable certificates of deposit are not included in M1. This is because they are considered less liquid compared to cash and checkable deposits, which are more readily spendable.

It's important to note that while M1 is the narrowest definition, there are broader definitions of the money supply. For example, M2 includes M1 along with savings deposits, small-time deposits, and retail money market mutual fund accounts. Moving further, M3 encompasses M2 plus large time deposits, institutional money market mutual fund balances, and repurchase agreements.

In conclusion, the narrowest definition of the money supply, M1, includes cash in bank vaults and checkable deposits, while excluding savings deposits, money market mutual fund accounts, and negotiable certificates of deposit.