<Li> Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States . (MB = $1000, M0 = $1000, M1 = $1000, M2 = $1000) </Li> <Li> Laura burns one of her $100 bills . The US M0, and her personal net worth, just decreased by $100 . (MB = $900, M0 = $900, M1 = $900, M2 = $900) </Li> <Ul> <Li> Laura takes the remaining nine bills and deposits them in her transactional account (checking account or current account by country) at her bank . (MB = $900, M0 = 0, M1 = $900, M2 = $900) </Li> <Li> The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money . If the minimum reserve is 10%, this means $90 will remain in the bank's reserve . The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the bank's excess reserves . </Li> <Li> The M1 money supply increases by $810 when the loan is made . M1 money is created . (MB = $900 M0 = 0, M1 = $1710, M2 = $1710) </Li> <Li> Laura writes a check for $400, check number 7771 . The total M1 money supply didn't change, it includes the $400 check and the $500 left in her account . (MB = $900, M0 = 0, M1 = $1710, M2 = $1710) </Li> <Li> Laura's check number 7771 is accidentally destroyed in the laundry . M1 and her checking account do not change, because the check is never cashed . (MB = $900, M0 = 0, M1 = $1710, M2 = $1710) </Li> <Li> Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account . MB does not change, it still has $900 in it, Alice's $100 and Laura's $800 . (MB = $900, M0 = 0, M1 = $1710, M2 = $1710) </Li> <Li> The bank lends Mandy the $810 credit that it has created . Mandy deposits the money in a checking account at another bank . The other bank must keep $81 as a reserve and has $729 available for loans . This creates a promise - to - pay money from a previous promise - to - pay, thus the M1 money supply is now inflated by $729 . (MB = $900, M0 = 0, M1 = $2439, M2 = $2439) </Li> <Li> Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank, who again stores 10% as reserve and has 90% available for loans . This process repeats itself at the next bank and at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10 times the MB money . (MB = $900, M0 = 0, M1 = $9000, M2 = $9000) </Li> </Ul> <Li> Laura takes the remaining nine bills and deposits them in her transactional account (checking account or current account by country) at her bank . (MB = $900, M0 = 0, M1 = $900, M2 = $900) </Li>

M1 is the most liquid measure of the money supply because its components