How does M0 differ from M1?

The distinction between M0 and M1 revolves around the definitions of money supply and the types of money they include. M0 represents the total of all physical currency in circulation, such as coins and paper bills. It refers strictly to the most liquid forms of money that can be immediately used for transactions.

M1, on the other hand, includes M0 and expands the definition to encompass other highly liquid assets. These additional assets in M1 include demand deposits (checking accounts) and other short-term instruments that can quickly be converted into cash. M1 effectively provides a broader picture of available money in the economy that people can readily access for spending, which is crucial for understanding economic transactions and liquidity.

Thus, the assertion that M0 includes only cash, while M1 encompasses both cash and other forms of readily available money captures the fundamental differences between these two monetary categories. Understanding this distinction is crucial for anyone studying economics or finance, particularly in the context of monetary policy and financial markets.