Introduction:
In economics and finance, the measurement and analysis of money supply are crucial in understanding the overall health and functioning of an economy. M2 money supply is one such important measure that provides insights into the amount of money circulating within an economy and its potential impact on inflation and economic activity. This article aims to explain the concept of M2 money supply, its components, and its significance in monetary policy and macroeconomic analysis.
Definition of M2 Money Supply:
M2 money supply is a broader measure of the money stock within an economy, which includes all components of M1 money supply along with additional types of financial assets. M1 money supply represents the most liquid forms of money, such as physical currency (coins and banknotes) and demand deposits (checking accounts). M2 money supply, on the other hand, encompasses M1 money supply and adds near money or less liquid financial assets, such as savings deposits, time deposits, and money market mutual funds.
Components of M2 Money Supply:
1. M1 Money Supply: This component comprises currency held by the public (both coins and banknotes) and demand deposits held in commercial banks or other financial institutions. M1 represents the most readily available and liquid forms of money that can be used for transactions.
2. Savings Deposits: Savings deposits include funds held in savings accounts, typically offered by commercial banks. These accounts usually have restrictions on the number of withdrawals or transactions, making them less liquid than demand deposits. However, savings deposits still contribute to the overall money supply as they can be converted into more liquid forms when needed.
3. Time Deposits: Time deposits, also known as certificates of deposit (CDs), are accounts where funds are held for a fixed period at a specified interest rate. Unlike savings deposits, time deposits have a predetermined maturity date and typically offer higher interest rates. Due to the fixed term, time deposits are less liquid than savings deposits but still form part of the M2 money supply.
4. Money Market Mutual Funds: Money market mutual funds are investment vehicles that pool funds from individual and institutional investors to invest in short-term, low-risk securities such as Treasury bills and commercial paper. Although they are not traditional forms of money, the shares or units of money market mutual funds are highly liquid and can be easily converted into cash or used for transactions, thus adding to the M2 money supply.
Importance of M2 Money Supply:
M2 money supply is a key indicator for policymakers and economists to monitor the availability of money within an economy. It provides insights into the potential inflationary pressures, economic activity, and the overall health of financial markets. An increase in M2 money supply can stimulate economic growth and investment by making more funds available for lending and spending. However, excessive growth in M2 money supply, if not matched by increased production and real economic activity, can lead to inflationary pressures and financial instability.
Central banks and monetary authorities closely monitor M2 money supply as part of their monetary policy framework. By adjusting interest rates, open market operations, and reserve requirements, central banks can influence the growth rate of M2 money supply to achieve their objectives, such as price stability and sustainable economic growth.
Conclusion:
M2 money supply is a comprehensive measure that encompasses M1 money supply and includes additional less liquid financial assets. It provides valuable insights into the overall availability of money in an economy and its potential impact on inflation and economic activity. Policymakers, economists, and investors closely monitor M2 money supply to assess the financial system's health and make informed decisions regarding monetary policy, investment strategies, and economic forecasts. Understanding M2 money supply is essential for anyone interested in macroeconomics and the
FAQs
M2, or 'broad money', includes everything in M1 plus other less liquid types of money. These less liquid forms include savings accounts, small denomination time deposits (deposits with a fixed term), and money market mutual funds.
What are the components of the M2 money supply? ›
M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.
How to interpret M2 money supply? ›
M2 is used as an indicator of possible increases or decreases in inflation levels. This is because it is a broader measure of the money supply in an economy than when compared with M1 – which only looks at money that is in the hands of the public.
What does the M2 definition of money supply include select the correct answer below? ›
M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs. M1 is an estimate of cash, checking, and savings account deposits only.
What are the 2 two components of money supply? ›
COMPONENTS OF MONEY SUPPLY: There are two main components of money supply, currency (or fiat money) and demand deposits.
What are the components of the M2 money supply quizlet? ›
M2 money supply is the money supply that includes currency, checking accounts in banks, traveler's checks, savings deposits, money market funds, and certificates of deposit.
What is the current M2 money supply? ›
Basic Info. US M2 Money Supply is at a current level of 20.97T, down from 20.98T last month and up from 20.86T one year ago. This is a change of -0.07% from last month and 0.53% from one year ago.
Which is an example of M2 money? ›
A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank.
What is the formula for the M2 money supply? ›
M2 = M1 + money market funds + certificates of deposit + other time deposits. The Federal Reserve System is responsible for tracking the amounts of M1 and M2 and prepares a weekly release of information about the money supply.
What is included in the M2 definition of money supply but not in the M1 definition? ›
M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks. Back to glossary.
The money supply is typically categorized into different components based on their liquidity and accessibility. The two main components are M1 and M2: M1 (Narrow Money): Currency in Circulation (C): Physical money, including coins and paper currency, held by the public.
What are the two key measures of money supply? ›
FAQs - Measures of Money Supply
Each measure captures a different level of liquidity and accessibility. M1 includes the most readily available forms like cash and checking accounts, while M2 adds less liquid assets like savings deposits.
What are the two main views of money supply? ›
Money supply includes both currency held by the public in terms of coins and paper notes as well as demand deposits of the people with the commercial bank.
What are the components of money supply M1 M2 M3? ›
M3 is broad money. M3 = M1 + Time deposits with the banking system. M2 = M1 + Savings deposits of post office savings banks. M1 = Currency with public + Demand deposits with the Banking system (savings account, current account).
What items are included in the M measure of money supply? ›
The M1 money supply includes all physical currency, traveler's checks, demand deposits, and other checkable deposits (e.g. checking accounts). While the M1 is a measure of all the most liquid forms of money in an economy, other forms of money supply are slightly different.
What is included in M2 but not in M1 money supply? ›
M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds.
Which of the following are counted in the M2 money supply? ›
Short Answer. In summary, M2 money supply measure includes the following components: (1) Currency in circulation; (2) Demand deposits; (3) Traveler's checks; (4) Savings deposits; (5) Small denomination time deposits (less than $100,000); and (6) Retail money market mutual funds.
