Which statement describes M2?

• A. M2 excludes M1 and only includes near money assets.
• B. M2 equals M1 plus a subset of government securities.
• C. M2 includes M1 plus near money assets such as savings deposits, money market deposits, small denomination time deposits, and retail money market mutual funds.
• D. M2 includes only cash holdings.

Answer: (C)

Monetary aggregates classify money by how easily it can be used for transactions. M2 expands on M1 by adding near-money assets that can be converted to cash quickly. Specifically, M2 equals M1 plus near-money assets such as savings deposits, money market deposit accounts, small-denomination time deposits, and retail money market mutual funds. This describes M2 best because it captures both the most liquid forms of money (M1) and funds that are close to money but not cash themselves. It isn’t just a subset of government securities, and it isn’t limited to cash holdings, which are already part of M1.