What Is M2 (Money Supply)?

M2 is a way to measure the total money circulating in an economy. It includes both highly liquid money, such as cash and checking deposits (M1), as well as less liquid assets, such as savings accounts, time deposits, and money market funds.

Economists, government officials, and investors look at M2 to understand how healthy the economy is. If there’s a lot of money out there, people and businesses are more likely to spend more. If there’s less money available, spending will naturally slow down.

What Is M2 Made of?

The US Federal Reserve calculates the M2 using multiple components, including cash and money in checking and savings accounts. It also includes certificates of deposits (CDs) and other assets that can be easily converted to cash.

1. Cash and checking accounts (also called M1)

This is the most basic and liquid form of money. It includes:

Physical currency (coins and paper money).

Money in checking accounts, which can be used with a debit card or checks

Traveler’s checks (less common today but still included in M1).

Other checkable deposits (OCDs). These are highly liquid accounts that can be used to make payments by check or debit card.

2. Savings Accounts

These are bank accounts where people keep money they don’t need right away. While savings accounts usually pay interest, they can have limits on how often you can take money out.

3. Time deposits

These are also called certificates of deposit (CDs). You agree to leave your money in the bank for a certain amount of time, and in return, the bank pays you interest. These deposits are usually under $100,000.

4. Money market funds

These are a type of mutual fund that invests in safe, short-term investments. They usually offer higher interest than savings accounts but have some restrictions on how you can use your money.