Which items are included in M2 money supply?

• A. Currency in circulation and checkable deposits
• B. M1 plus savings deposits, small time deposits, and retail money-market funds
• C. Savings deposits plus small time deposits
• D. All financial assets including stocks and bonds

Answer: (B)

Money in M2 includes M1 plus assets that are easily converted to cash, or near money. M1 covers currency in circulation and checkable (demand) deposits—money you can spend or withdraw immediately. M2 adds items that aren’t as liquid as cash but can be quickly converted with little loss of value: savings deposits, small-denomination time deposits, and retail money-market mutual funds. These additions matter because they are not quite cash, but they function as money you could readily use for transactions or convert into cash without major frictions.

This is why the option describing M2 as M1 plus savings deposits, small time deposits, and retail money-market funds is correct. It captures the broader, but still liquid, concept of money beyond immediate spendability. Excluding any of these components leaves out part of what people and firms consider usable money, while including all financial assets such as stocks and bonds would overstate how liquid and readily usable those assets are.