What are the measures of money supply? (2024)

FAQs

What are the measures of money supply? ›

There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

The money supply of an economy is measured in the M1, M2, M3, and M4. M1 relates to all the cash and coins in circulation. It is more liquid than the M2, which is the biggest measure of the money supply. It is used as a primary metric when policy-makers formulate monetary policies.

M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These gradations are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply.

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. The weekly M2 and M1 numbers are closely monitored as indicators of the overall money supply.

M1 and M2 money have several definitions, ranging from narrow to broad. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.

The U.S. money supply is reported in two main categories, M1 and M2. M0 is included in both M1 and M2. M0 is the total amount of paper money and coins in circulation, plus the current amount of central bank reserves. M1 is the most frequently reported headline number.

Answer and Explanation:

The value of money is measured by its purchasing power. Purchasing power is the amount of real goods and services a given nominal amount can purchase. Thus, the higher the price level, the lower the real value of money.

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.

The formula for money supply is MS = (MB x MM). MB, or monetary base, is the amount of money in circulation or available to be circulated. MM is money multiplier, which is calculated by dividing 1 by the required reserve set by the Federal Reserve.

M1: Currency in circulation plus overnight deposits. M2: M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months. M3: M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years.

Is a credit card M1 or M2? ›

A credit card is not a part of the M1 or M2 money supply, and as a matter of fact, is not part of the money supply at all. This is because money supply is the aggregate value of monetary assets, and does not include liabilities. Credit card balance represents a liability, not an asset.

Gold isn't any form of money in today's world. It has a value, but cannot be used as a currency, or a substitute for money. This is because it cannot be considered to be similar to notes, coins and deposits. Thus, gold does not fall in any of the money categories - it is neither M1 and M2, nor M3.

The components of the most liquid measures of the money supply, M0 and M1, all act as a medium of exchange in the economy, while the added components of M2 are used primarily as a store of value. Thus, the general idea is that there is a positive relationship between the medium of exchange property and liquidity.

Deflation is the decline in the price level of goods and services associated with a contraction in the supply of money and credit. The money supply is influenced by central banks. When the supply of money falls, without a corresponding decrease in economic output, the prices of all goods tend to fall.

The M3 classification is the broadest measure of an economy's money supply. It emphasizes money as a store of value more so than as a medium of exchange, hence the inclusion of less-liquid assets in M3.

Notice that the largest component of M1, just over half, is the coin and currency in circulation.

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.

The term 'Narrow Money' is derived from the fact that M1/M0 are the narrowest or most restrictive types of money that form the basis for an economy's medium of exchange. The narrow supply of money includes only the most liquid financial assets. These funds must be available on-demand.

These are the primary components of the money supply within an economy. Factors influencing these components include interest rates, political stability, economic growth, and inflation expectations.

COMPONENTS OF MONEY SUPPLY​: There are two main components of money supply, currency (or fiat money) and demand deposits.