What does M1 measure in terms of money supply?

M1 is a measure of the money supply that includes the most liquid forms of money. Specifically, it encompasses all physical currency in circulation, such as coins and paper money, as well as demand deposits — the funds accessible in checking accounts that can be withdrawn on demand.

By focusing on the sum of all currency held by individuals and businesses, M1 effectively captures the money that is readily available for transactions, reflecting the immediate purchasing power within an economy. This understanding is crucial for analyzing economic activity, as M1 indicates the amount of money circulating that can be quickly used for spending, thus impacting consumer behavior and economic growth.

The other options provided do not accurately represent M1. For example, the total number of stocks and bonds relates to investments rather than liquid money, physical currency held by government does not encompass money held by individuals and businesses, and the total market value of all goods pertains to economic output but not to the money supply itself. This distinction is essential for comprehending how M1 functions within the broader context of monetary policy and economic analysis.