Which of the following is not counted in M1?
In the realm of monetary economics, the classification of money into different measures is crucial for understanding the liquidity and the overall state of an economy. M1, one of the most commonly used measures of money supply, represents the most liquid portion of the money supply. However, not all forms of money are included in M1. This article aims to explore which of the following is not counted in M1 and why.
Understanding M1
M1 is a measure of money supply that includes the most liquid forms of money that can be used for transactions. It is calculated by adding up currency in circulation, demand deposits, and traveler’s checks. Currency in circulation refers to the physical money held by the public, while demand deposits are funds held in checking accounts that can be withdrawn on demand. Traveler’s checks are preprinted checks that can be cashed by the bearer or a named payee.
What is Not Counted in M1?
Now, let’s delve into the various forms of money that are not included in M1:
1. Savings Deposits: These are funds held in savings accounts, which are not as liquid as demand deposits. While savings deposits can be withdrawn, they often require prior notice or a penalty for early withdrawal.
2. Time Deposits: Similar to savings deposits, time deposits are funds held in fixed-term accounts, such as certificates of deposit (CDs) or money market deposit accounts (MMDAs). These accounts have a fixed maturity date and cannot be withdrawn before the maturity date without incurring penalties.
3. Money Market Funds: These are mutual funds that invest in short-term, high-quality debt securities. While they are highly liquid and can be easily converted into cash, they are not considered part of M1 because they are not directly held by the public.
4. Retirement Accounts: Retirement accounts, such as IRAs or 401(k)s, are designed for long-term savings and are not included in M1. These accounts typically have strict withdrawal rules and penalties for early withdrawal.
5. Securities: Stocks, bonds, and other securities are not included in M1 because they are not considered money. While they can be sold for cash, they are not as liquid as the components of M1.
Conclusion
In conclusion, M1 is a measure of money supply that includes the most liquid forms of money. However, certain forms of money, such as savings deposits, time deposits, money market funds, retirement accounts, and securities, are not counted in M1. Understanding the components of M1 and the forms of money that are excluded from it is essential for analyzing the liquidity and overall state of an economy.
