If the money supply is measured using ________, fluctuations in velocity are ________.
A) M1 rather than M2; increased
B) M1 rather than M2; reduced
C) M1 rather than M2; eliminated
D) M2 rather than M1; eliminated

Question

Quizplus · Accepted Answer

The velocity of money tends to fluctuate more when the money supply is measured using M1 rather than M2. M1 is a narrower measure of the money supply, including only the most liquid forms of money (e.g., cash and checking deposits). M2 includes M1 plus less liquid forms of money, such as savings deposits and money market funds. Because M2 includes a broader range of assets, it tends to be more stable, and thus, fluctuations in velocity are increased when focusing on M1.

If the Money Supply Is Measured Using ________, Fluctuations in Velocity