The money supply has different components and M1 is the measure of the component that includes the physical money held by public. It is the asset individuals or businesses can directly use for investment or for making payments of any kind.
M1 includes coins, currency, NOW, checking amounts, and assets that can be quickly converted into physical money. It is used to calculate the amount of money that is in circulation or in other words money in the hands of public.
From the cash paid during grocery shopping to the amount exchanged during debit card transactions, it all falls under the M1 category.
Money Supply can be defined as the total amount of money for a particular economy. Since money is present in different forms of assets, measuring the total supply requires measuring each form of asset individually. M1 is one of the measures used specifically for the most liquid assets, held by the public and not by the state.
There are other measures including M2, M3, and MB that are used for other forms of assets. While M2 and M3 also include M1 in the calculation, they yield a different result because they may include other assets that are not as liquid.
Money supply measurement plays an important role in helping economists track GDP and predict changes in economic indicators such as inflation. Measures of money supply are also used by the Federal authorities for conducting monetary policies.
It is worth nothing that the definition of M1 and other measures of money supply may vary for each country, and so does the way these values are utilized.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!