Narrow money, also referred to as M1 or M0, is the purest form of money supply comprising physical money like coins, currency, demand deposits, and other liquid assets that are held by the central bank.
In the United States, narrow money is classified under M1 (M0 + demand accounts). On the other hand, in the United Kingdom, the narrowest measure of money consists of notes and coins in circulation.
Key Highlights
- Narrow money, also known as M0 or M1, includes physical currency, coins, demand deposits, and other liquid assets easily accessible to central banks.
- It is a subset of broad money, which encompasses long-term deposits and other types of deposit accounts.
Unpacking Narrow Money
The term
Related Terms: broad money, M2, M3, demand deposits, central bank, liquidity.
References
- Organisation for Economic Co-operation and Development. “Narrow Money (M1)”.
- Board of Governors of the Federal Reserve System. “What Is the Money Supply? Is it Important?”
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does "narrow money" specifically refer to in financial terms?
- [ ] All forms of money supply including M1, M2, and M3
- [ ] Only long-term savings accounts and certificates of deposit
- [x] The most liquid forms of money such as cash and checking deposits
- [ ] The comprehensive measure of money supply of an economy
## Which component is NOT typically included in the definition of narrow money?
- [x] Savings accounts with time restrictions
- [ ] Currency in circulation
- [ ] Demand deposits
- [ ] Traveler's checks
## Narrow money (M1) predominantly includes which of the following?
- [ ] Mutual funds
- [ ] Certificates of deposit (CDs)
- [x] Cash and checking accounts
- [ ] Stock holdings
## Why is narrow money considered to be highly liquid?
- [ ] Because it includes real estate assets easily sold for cash
- [ ] Because it includes investments that yield high returns over time
- [ ] Because it consists of long-term financial instruments
- [x] Because it includes forms of money that can be quickly and easily used for transactions
## What is one of the primary differentials between narrow money (M1) and broad money (M2, M3)?
- [ ] Narrow money includes a wider range of financial instruments than broad money
- [x] Broad money includes narrow money plus additional forms like savings deposits and money market funds
- [ ] Narrow money encompasses all forms of savings and timed deposits
- [ ] Broad money is more liquid than narrow money
## Which of the following would be the best example of narrow money?
- [x] Cash in a person’s wallet and funds in a checking account
- [ ] Money set aside in a long-term deposit account
- [ ] Balance in a retirement savings account
- [ ] Value of stocks and bonds held for investment purposes
## What is another common term often used synonymously with narrow money?
- [ ] Capital money
- [x] M1
- [ ] Broad money
- [ ] Term deposits
## Which monetary measure might a central bank frequently refer to for immediate liquidity and control mechanisms?
- [ ] M3
- [x] M1 (narrow money)
- [ ] M2
- [ ] GNP
## Demand deposits money can best be described as:
- [ ] Fixed savings in a long-term bond
- [x] Funds deposited in bank accounts that can be accessed on demand without any penalties or restrictions
- [ ] Money invested in high-yield instruments
- [ ] Capital tied up in property investments
## Increase in narrow money supply usually suggests:
- [ ] High levels of investments in real estate
- [ ] A decrease in currency circulation
- [x] An increase in readily accessible funds for consumers and businesses
- [ ] A decrease in liquid financial assets
