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By the end of this section, you will be able to:

  • Contrast M1 money supply and M2 money supply
  • Classify monies as M1 money supply or M2 money supply

Cash in your pocket certainly serves as money. But what about checks or credit cards? Are they money, too? Rather than trying to state a single way of measuring money, economists offer broader definitions of money based on liquidity. Liquidity refers to how quickly a financial asset can be used to buy a good or service. For example, cash is very liquid. Your $10 bill can be easily used to buy a hamburger at lunchtime. However, $10 that you have in your savings account is not so easy to use. You must go to the bank or ATM machine and withdraw that cash to buy your lunch. Thus, $10 in your savings account is less liquid.

The Federal Reserve Bank , which is the central bank of the United States, is a bank regulator and is responsible for monetary policy and defines money according to its liquidity. There are two definitions of money: M1 and M2 money supply. M1 money supply    includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler’s checks M2 money supply    is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and money market funds.

M1 money supply includes coins and currency in circulation    —the coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as demand deposits . These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when a check is written or a debit card is used. These items together—currency, and checking accounts in banks—make up the definition of money known as M1, which is measured daily by the Federal Reserve System. Traveler’s checks are a also included in M1, but have decreased in use over the recent past.

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. Many banks and other financial institutions also offer a chance to invest in money market funds , where the deposits of many individual investors are pooled together and invested in a safe way, such as short-term government bonds. Another ingredient of M2 are the relatively small (that is, less than about $100,000) certificates of deposit (CDs) or time deposits , which are accounts that the depositor has committed to leaving in the bank for a certain period of time, ranging from a few months to a few years, in exchange for a higher interest rate. In short, all these types of M2 are money that you can withdraw and spend, but which require a greater effort to do so than the items in M1 [link] should help in visualizing the relationship between M1 and M2. Note that M1 is included in the M2 calculation.

Questions & Answers

for an economy the following function have been given. C=100+0.8y, S=100+0.2, i=120-5r, Ms=120, Md=0.2y-5r find out IS equation. LM equation. Equilibrium level of income and interest rate.
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hi
CRISPYN
aggregate expenditure model til monetery policy
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Using the Solow growth model discuss the implications of the covid19 pandemic on the prospects of long run economic growth for South Africa
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ln last word discuss (if. ,at all)changes in the stock prices relate to macroeconomic stability
rachel Reply
what do you know about the nigration in labor economic ?
Goleen
how do I find savings in a national income question calculation
Ayo Reply
Savings = Income - consumption... Remember Y=C+I+G-(X-M)
Mike
what is the most issue of macroeconomic?
Tarik Reply
Unemployment since it covers the youth and all the pension leavers.
aboagye
I would say economic growth. Economic growth stems from proper use of factors of Productions, good political reforms, investments (Foreign & local), employment, low levels of inflation & stable currency.
Mike
Calculate the cross elasticity of demand by using the following data: Price of petrol rises from Rs. 20 per litre to Rs. 25 per litre so as the demand for cars falls from 50 per month to 30 per month.
karnika Reply
what does it indicate when there is an increase in supply
Sisanda Reply
cost of production might have decreased whereas price must have been increased also interest rate might have been lowered
kazim
it indicates that the demand for goods in the market is lesser than the supply caused by an increase in prices thereby leading to inflation
Angel
what is the the strength of using GDP
KEJI Reply
what is macro economics
Sana Reply
the branch of economics that focuses on board issue such as growth unemployment inflation and trade balance.
Ghazi
money in a modern economic
Vishal Reply
Use the table below answer questions the following question Variables R millions Current consumption expenditure by the general government 15 000 Indirect Taxes on products 5 000 Private consumption expenditure by households 10 000 Exports of goods and services to the rest of the world 5 0
Aphiwe Reply
an economy starts off with a GDP per capita of $5000. How large will the GDP per capita be if it grow at an annual rate of 2% for 20years
King Reply
5000*(1+0.02)*20=7,450 USD
Modek
Nice
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how have total output abd output
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what are the different types of unemployment
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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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