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Given many changes in banking and the prevalence of electronic banking, M2 is now favored as a measure of money rather than the narrower M1.

(True/False)

1 Answer

4 votes

Final answer:

True, M2 has become a preferred measure of money over M1 due to changes in banking that have blurred the distinctions between different forms of money and made savings accounts more similar to checking accounts.

Step-by-step explanation:

The statement is true; M2 is now favored as a measure of money rather than the narrower M1 due to the prevalence of electronic banking and changes in banking practices. M1 includes more immediate forms of money such as cash, checkable (demand) deposits, and traveler's checks, whereas M2 encompasses M1 plus other forms of savings that have become increasingly liquid, such as savings deposits, money market funds, certificates of deposit, and other time deposits. Over time, the distinction between these two measures has become less clear as savings accounts have begun to offer services traditionally associated with checking accounts, making them more accessible and similar to M1 accounts. Therefore, M2 presents a more comprehensive understanding of the money supply in the current economic environment.

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User Zuzana
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