Principles of Macroeconomics / Unit 11 MAC 1008 worked example, 60 to 90 seconds
M1, M2 or Neither
The idea
Classify each item as M1, M2 or neither. Two questions settle it. Is this a means of payment or nearly one? If so it is in M1. If it is a close substitute that takes a step to spend, it is in M2 but not M1. If it is neither a payment instrument nor a near substitute, it is not money at all, however valuable it is.
In practice
A twenty-dollar note is M1, being currency in circulation. A checking balance is M1. A savings deposit is M1 since May 2020. A small certificate of deposit is in M2 and not in M1, because it is committed for a term. A retail money market fund is M2 for the same reason. A share of stock is neither: it is wealth, and selling it takes time and carries price risk. A car is neither. A credit card is neither, and the next entry says why.
Where people slip
The trap is treating value as the test. A share of stock and a house are worth a great deal and are not money, while a small balance in a current account is money. The test is readiness to be spent, not worth.
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