M1 is a measure of the money supply that includes currency and demand deposits. Currency in circulation is the largest component of M1, accounting for 54 percent. Demand deposits are total deposits at commercial banks and foreign related institutions, excluding those due to the U.S. government, U.S. and foreign depository institutions, and foreign official institutions. M1 does not include financial assets like bonds.
Key Facts
- M1 is a measure of the money supply that includes currency and demand deposits.
- Currency in circulation is the largest component of M1, accounting for 54 percent.
- Demand deposits are total deposits at commercial banks and foreign related institutions, excluding those due to the U.S. government, U.S. and foreign depository institutions, and foreign official institutions.
- M1 does not include financial assets like bonds.
- M1 is a narrow measure of the money supply and is no longer used as a guide for monetary policy in the U.S..
- The M1 money supply is reported on a monthly basis by the Federal Reserve Bank of St. Louis.
Currency as Legal Tender
Currency, which comprises physical coins and paper money, is legal tender in the United States. This means that it is a form of payment that creditors are required to accept for the settlement of debts. The legal tender status of currency is established by law and is generally accepted by all parties in a transaction.
Demand Deposits and Legal Tender
Demand deposits, which are checking accounts and other similar accounts that allow depositors to withdraw funds on demand, are not legal tender. This is because demand deposits are not considered to be “money” in the same way that currency is. Demand deposits are merely a claim on money that is held by a bank or other financial institution.
Conclusion
In conclusion, the only component of M1 that is legal tender is currency. Demand deposits, which are the other major component of M1, are not legal tender. This is because demand deposits are not considered to be “money” in the same way that currency is.
References
- End of Chapter 31 Questions. (n.d.). Retrieved from https://www.svsd.net/cms/lib5/pa01001234/centricity/domain/871/end%20of%20chapter%2031%20questions.doc
- Currency Component of M1/(Demand Deposits+Currency Component of M1). (n.d.). Retrieved from https://fred.stlouisfed.org/graph/?g=34Kf
- M1 Money Supply: How It Works and How to Calculate It. (2023, February 16). Retrieved from https://www.investopedia.com/terms/m/m1.asp
FAQs
What is M1?
M1 is a measure of the money supply that includes currency and demand deposits.
What is currency?
Currency is physical coins and paper money.
Is currency legal tender?
Yes, currency is legal tender in the United States. This means that creditors are required to accept it for the settlement of debts.
What are demand deposits?
Demand deposits are checking accounts and other similar accounts that allow depositors to withdraw funds on demand.
Are demand deposits legal tender?
No, demand deposits are not legal tender. This is because they are not considered to be “money” in the same way that currency is.
Why are demand deposits not legal tender?
Demand deposits are not legal tender because they are merely a claim on money that is held by a bank or other financial institution.
What is the difference between currency and demand deposits?
Currency is physical coins and paper money, while demand deposits are checking accounts and other similar accounts that allow depositors to withdraw funds on demand. Currency is legal tender, but demand deposits are not.
What is the largest component of M1?
Currency in circulation is the largest component of M1, accounting for 54 percent.