Coins in people’s pockets and purses are: Coins in peoples pockets and purses are A included in M 1 but not in M 2 B

Coin Purse –

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  • Measuring Money: Currency, M1, and M2

    Learning Objectives

    • Contrast and classify monies as either M1 money supply and M2 money supply

    Measuring Money: Currency, M1, and M2

    We defined money as anything that is generally accepted as a means of payment, is a store of value, can be used as a unit of account or a standard of deferred payment. What exactly is included?

    Cash in your pocket certainly serves as money. But what about checks or credit cards? Are they money, too? Rather than trying to state a single way of measuring money, economists offer broader definitions of money based on the concept of liquidity. Liquidity refers to how quickly an asset can be used to buy a good or service. Liquidity is a relative concept. For example, cash is very liquid. Your $10 bill can be easily used to buy a hamburger at lunchtime. However, $10 that you have in your savings account is not so easy to use. You must go to the bank or ATM machine and withdraw that cash to buy your lunch. Thus, $10 in your savings account is less liquid. Stocks and bonds are even less liquid, since they must be sold to convert them to means of payment, and they might suffer a loss in value in the process.

    Economists generally use two definitions of the supply of money: M1 and M2. M1 includes those assets that are the most liquid such as cash, checkable (demand) deposits, and traveler’s checks.  M2 includes M1 plus some less liquid (but still fairly liquid) assets, including savings and time deposits, certificates of deposit, and money market funds. Let’s examine these two money definitions in more detail.


    M1 is the most narrow definition of the money supply. It includes coins and currency in circulation—in other words they are not held held by the U.S. Treasury, or the Federal Reserve Bank, but circulate in the economy.

    Closely related to currency are checkable deposits, also known as demand deposits. These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when a check is written or a debit card is used. These items together—currency, and checking accounts in banks—make up most of M1. Traveler’s checks are also included in M1, but have decreased in use over the recent past.


    A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank. Many banks and other financial institutions also offer a chance to invest in money market funds, where the deposits of many individual investors are pooled together and invested in a safe way, such as short-term government bonds. Another ingredient of M2 is small denomination (that is, less than about $100,000) certificates of deposit (CDs) or time deposits, which are accounts that the depositor has committed to leaving in the bank for a certain period of time, ranging from a few months to a few years, in exchange for a higher interest rate. In short, all these types of M2 are money that you can withdraw and spend, but which require a greater effort to do so than the items in M1. Figure 1 should help in visualizing the relationship between M1 and M2. Note that M1 is included in the M2 calculation.

    Figure 1. The Relationship between M1 and M2 Money. M1 and M2 money are the two mostly commonly used definitions of money. M1 = coins and currency in circulation + checkable (demand) deposit + traveler’s checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.


    The Federal Reserve System is responsible for tracking the amounts of M1 and M2 and prepares a weekly release of information about the money supply. At the end of February 2015, M1 in the United States was $3 trillion, while M2 was $11.8 trillion. Table 1 gives a breakdown of the portion of each type of money that comprised M1 and M2 in February 2015, as provided by the Federal Reserve Bank.

    ‘ Under the ‘Components of M1 in the U.S. (February 2015, Seasonally Adjusted)’ column are the values: Currency; Traveler’s checks; Demand depositions and other checking accounts; and Total M1. Under the ‘$ billions’ column are the values: $1,271.8; $2.9; $1,713.5; and $2,988.2 (or $3 trillion). The sixth row is a header row and it labels each column, ‘Components of M2 in the U.S. (February 2015, Seasonally Adjusted)’ and ‘$ billions’. Under the ‘Components of M2 in the U.S. (February 2015, Seasonally Adjusted)’ column are the values: M1 money supply; Savings accounts; Time deposits; Individual money market mutual fund balances; and Total M2. Under the ‘$ billions’ column are the values: $2,988.2; $7,712.1; $509.2; $610.8; and $11,820.3 (or $11.8 trillion).”>

    Table 1. M1 and M2 Federal Reserve Statistical Release, Money Stock Measures(Source: Federal Reserve Statistical Release,
    Components of M1 in the U. S. (February 2015, Seasonally Adjusted) $ billions
    Currency $1,271.8
    Traveler’s checks $2.9
    Demand deposits and other checking accounts $1,713.5
    Total M1 $2,988.2 (or $3 trillion)
    Components of M2 in the U.S. (February 2015, Seasonally Adjusted) $ billions
    M1 money supply $2,988.2
    Savings accounts $7,712.1
    Time deposits $509.2
    Individual money market mutual fund balances $610.8
    Total M2 $11,820.3 (or $11.8 trillion)

    The lines separating M1 and M2 can become a little blurry. Sometimes elements of M1 are not treated alike; for example, some businesses will not accept personal checks for large amounts, but will accept traveler’s checks or cash. Changes in banking practices and technology have made the savings accounts in M2 more similar to the checking accounts in M1. For example, some savings accounts will allow depositors to write checks, use automatic teller machines, and pay bills over the Internet, which has made it easier to access savings accounts. As with many other economic terms and statistics, the important point is to know the strengths and limitations of the various definitions of money, not to believe that such definitions are as clear-cut to economists as, say, the definition of nitrogen is to chemists.

    Try It

    Other Money

    Where does “plastic money” like debit cards, credit cards, and smart money fit into this picture? A debit card, like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller. Thus, a debit card is every bit as much money as a check. It is important to note that in our definition of money, it is checkable deposits that are money, not the paper check or the debit card. Although you can make a purchase with a credit card, it is not considered money but rather a short term loan from the credit card company to you. When you make a purchase with a credit card, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card bill, you have effectively borrowed money from the credit card company. With a smart card, you can store a certain value of money on the card and then use the card to make purchases. Some “smart cards” used for specific purposes, like long-distance phone calls or making purchases at a campus bookstore and cafeteria, are not really all that smart, because they can only be used for certain purchases or in certain places.

    In short, credit cards, debit cards, and smart cards are different ways to move money when a purchase is made. But having more credit cards or debit cards does not change the quantity of money in the economy, any more than having more checks printed increases the amount of money in your checking account.

    One key message underlying this discussion of M1 and M2 is that money in a modern economy is not just paper bills and coins; instead, money is closely linked to bank accounts. Indeed, the macroeconomic policies concerning money are largely conducted through the banking system.

    Try It

    These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Practice until you feel comfortable doing the questions.


    coins and currency in circulation:
    the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults
    credit card:
    immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan
    debit card:
    like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller
    demand deposit:
    checkable deposit in banks that is available by making a cash withdrawal or writing a check
    how quickly and easily an asset can be converted to a means of payment to make a purchase
    M1 money supply:
    a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.
    M2 money supply:
    a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit
    money market fund:
    the deposits of many investors are pooled together and invested in a safe way like short-term government bonds
    savings deposit:
    bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account
    smart card:
    stores a certain value of money on a card and then one can use the card to make purchases
    time deposit:
    account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit



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    History of wallets, money, coins


    The history of wallets, money, coins

    The history of the wallet is closely related to the history of money. Ever since ancient people invented a universal means of payment, money has existed in the form of coins. The very word “money” comes from the Turkic “tenge” – this word, modified in some places, just denoted the name of a small silver coin in the countries of the East, Ancient Greece and Persia.

    Recall, by the way, that the history of coins dates back to the 7th century BC in the Asia Minor state of Lydia. Coins were minted from gold, silver and electum, a natural alloy of these metals. Of course, people even then treated money too respectfully to carry it with them in their fists … The ancient Greeks, for example, put coins in a special canvas bag that was hung from the chiton’s belt. The inhabitants of Rome made a real contribution to the history of wallets: they were the first to make leather coin bags. These pouches were often decorated with embroidery, precious stones and metals, and they were still worn on the belt.

    In the Middle Ages, several types of wallets appeared, which, however, could be intended not only for storing money, but also for other attributes of trade, such as folding scales, weights, a stone for determining the quality of precious metals .

    The most common belt pouch during the 11th-15th centuries was a product tied with a cord, made in the form of a tube or a round leather blank. In Europe, such a wallet was given the French name “omonier”, and in Rus’ a number of words were used for it: haman, kalita, pocket, bag, purse. Perhaps the Russians thus distinguished handbags by their design – rounded, elongated or rectangular; they could also differ in location – in addition to the belt, small wallets were sometimes hung around the neck or folded into another, larger handbag.

    Austrian handmade wallet (satin stitch)


    Purse with the plot “Diana the hunter”.



    It is also known that ancient Russian people put money in different places depending on its purpose, for example, they had special bags for alms and alms, small change and large savings were kept separately. However, history still finds it difficult to accurately correlate various types of medieval purses with their ancient Russian names.

    Judging by the finds of archaeologists, as early as the 14th century, rectangular white leather wallets began to be found, which, moreover, had several sewn pockets, they were also tightened with a cord. In addition to tie-down purses, flap bags are also used; one of these belt bags was found in Novgorod and dates back to about the 15th century. The handbag has 3 internal compartments and a secret pocket, it corresponds in size to sheet A4, the outer flap is decorated with bronze inserts and fastens with a bronze clasp, and a loop for a waist belt is sewn above it.

    Heraldic purse associated with marriage


    Purse and pincushion

    Mother-of-pearl with silk

    Also in this period there are belt purses with metal frames, which have a lyre-shaped or pear-shaped shape. Several such items were also found near Novgorod.
    All these wallets were hung from the belt and therefore had a huge drawback: they could easily be stolen. It was to prevent theft, and not for decoration, that bells were sometimes attached to wallets. In addition, they could be hidden under outerwear, specially leaving small cuts in it for the hand.

    Jenny Wade’s purse found at the Battle of Gettysburg French purse 13th-14th century

    It was customary to wear wallets on the waist belt until the 16th and 17th century, when clothes with pockets began to come into fashion. Around the same time, the production of printed money began in Europe, and in 1769, by decree of Catherine II, paper banknotes appeared in Russia. They were accepted as equivalent to minted coins, and since then, a completely new era begins in the history of wallets. It was during this period that the prototypes of those wallets, purses and envelope wallets that, with various modifications, we buy today are already beginning to appear.

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    Money: our gestures betray us

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    I prefer to carry a stack of banknotes with me

    A stack of banknotes is usually associated with freedom and independence, the ability to make decisions independently. For many men, she is a symbol of male power. The presence of a large amount of money relieves anxiety in those who are afraid of being in an awkward situation when money may not be enough.

    I put money in my jacket pocket

    Many people are afraid of losing money. When the bills are in the inner pocket, they can be monitored by lightly touching the clothing with your hand. The habit of putting money in the front pocket also indicates the need for protection: banknotes seem to cover a person, serve as a shield, a barrier between him and the world.

    I keep money in my pants pockets

    People who put money in their side pockets sometimes feel the urge to touch it. This gesture is the equivalent of masturbation, only no one will condemn a person fingering banknotes in his pocket. Those who keep money in their back pocket may subconsciously not want to see it. But at the same time, it is important for such people to keep money under control. Although in this case they are more than others at risk of being robbed.

    I always keep money in my wallet

    Some people like to spend money, others enjoy keeping it. A purse or wallet is also an accessory that reflects the owner’s belonging to a certain social group and emphasizes financial viability. A tightly stuffed wallet, like a dense bundle of money, gives a man self-confidence.

    I never carry cash with me

    Lack of cash is a behavioral feature of wealthy people who are used to feeling unlimited power. A credit card creates a feeling of “clean”, intangible money. Such an illusion of wealth and purity is used in casinos, where cash replaces tokens. Those who pay by card often refer to the convenience of virtual money. However, one can also see in his behavior an unwillingness to meet real money and what is associated with it.

    I love to touch coins

    When we touch coins, we return to childhood memories of pocket money given to us by our parents. The habit of sorting out coins is more characteristic of men. The sexual symbolism of coins is historically associated with the manifestation of masculinity. Men like to jingle change in their pockets, as if demonstrating their sexual power, while experiencing both pleasure and slight shame at the same time.

    Some of us always keep one or more currency notes in our wallet or jacket pocket. “For many Russians, it is she who symbolizes a stable life,” says psychoanalyst Andrei Rossokhin. Dollars or euros in a special compartment of the wallet or mixed with rubles speak of the desire to belong to a world where everything is calm and reliable. And become more resilient yourself by holding a piece of stable life in your wallet.

    I like it when there are a lot of banknotes

    Large banknotes are associated with belonging to the social elite. Some people like to carry a lot of lower denomination bills, but their inner intention remains the same – to add value through the display of wealth. Confidence is given not by one or two large bills, but by a “stocking” stuffed with small money.