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Let's say Ronny decides to open a one-time deposit account at the same bank and take all the money out of his checking account. Following this transaction: M1 declines but M2 does not.
Economists provide more comprehensive definitions of money based on liquidity as opposed to a single unit of measurement. How soon a financial asset can be used to purchase a good or service is referred to as liquidity. Cash is one example of a liquid asset.
Money has two definitions: the M1 money supply and the M2 money supply. Money that is extremely liquid, such as cash, checkable (demand) deposits, and traveler's checks, is included in the M1 money supply. The M1 money supply adds savings and time deposits, certificates of deposits, and money market funds to make up the M2 money supply, which is less liquid.
M2 is a more expansive definition of money that includes more deposit types in addition to everything in M1. Bank savings accounts, for example, allow you to deposit money but not make checks on them directly. However, you may easily withdraw money Savings deposits are included in M2. Money market funds, which pool the deposits of numerous individual investors and invest them in safe assets like short-term government bonds, are another option offered by many banks and other financial institutions.
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