What is the money supply (M2)?
The money supply (M2) is used to measure the total amount of money in circulation in the 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 the money supply (M2) to understand the strength of the economy. If there is a significant amount of cash liquidity available, individuals and businesses are more likely to spend more. Conversely, if cash liquidity decreases, spending will naturally slow down.
What is the money supply (M2) composed of?
The U.S. Federal Reserve calculates the money supply (M2) using multiple components, including cash and funds in checking and savings accounts. It also includes certificates of deposit (CDs) and other assets that can be easily converted to cash.
1. Cash and checking accounts (M1)
This money supply is the simplest and most liquid form of money. It includes:
Physical currency (coins and paper money).
Funds in checking accounts, which can be used with debit cards 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 individuals keep funds they do not need immediately. Although savings accounts typically pay interest, they may impose restrictions on the number of withdrawals.
3. Time deposits
Also called certificates of deposit. You agree to leave your money in the bank for a specified period, and in return, the bank pays you interest. These deposits are usually less than $100,000.
4. Money market funds
These are a type of mutual fund that invests in safe, short-term investments. They typically offer higher yields than savings accounts, but they have some restrictions on how you can use your money.$BTC
