What Is M2?
M2 is the U.S. Federal Reserve's estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.
The Federal Reserve tracks a separate money supply number, M1, that includes currency in people's pockets or their checking accounts and savings accounts. The money deposited in time deposits and money market funds is not counted in M1. For the Fed's purposes, this is "near money." That is, the funds cannot be used as a medium of exchange and are not instantly convertible to cash.
Key Takeaways
- 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. Too-fast growth in the numbers can be a warning sign of inflation.
- Another money supply number, M3, includes all of the above plus large institutional cash deposits. The M3 is published quarterly.
- Gold is not counted in M1, M2, or M3. In the modern world, gold is no longer used as a common currency.
Understanding M2
Measuring the money supply of an economy is a challenging proposition. Due to the complexity of the concept of "money" and the size and level of detail of an economy, there are multiple ways of measuring a money supply.
These measures are typically classified as "M" s and fall along a spectrum from narrow to broad monetary aggregates. Typically, the "M" s range from M0 to M3, with M2 representing a fairly broad measure.
M2 is a more comprehensive calculation than M1 because it includes assets that are highly liquid but are not intended to be routinely used as cash. Consumers and businesses don't usually use time deposits when making purchases or paying bills, but in a pinch, they could convert them to cash in short order.
13 includes numbers on large-time deposits, institutional money market funds,and other large liquid assets. This is published on a quarterly basis.
M1 and M2 Reporting Times
The Federal Reserve releases M1 and M2 numbers every Thursday at 4:30 p.m. The St. Louis Fed tracks the numbers.
Economists usually use the broader M2 number when discussing the money supply because modern economies often involve transfers between different account types.
For example, a business may periodically transfer $10,000 from a money market account to a checking account. This transfer would increase M1, which doesn’t include money market funds, while keeping M2 stable since it contains both accounts.
M2 Uses
M2 is a critical factor in forecasting inflation. Inflation and current interest rates have major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balances.
Changes in Money Supply
The Federal Reserve's dual mandate is price stability and maximum sustainable employment. One of the ways it works to maintain price stability is by manipulating the M2 money supply.
The M2 numbers provide important insight into the direction, extremity, and efficacy of central bank policy.
M2 has consistently been growing. It was $4.7 trillion on Jan. 3, 2000, and was $20.8 trillion on March 2, 2024. The most extreme growth occurred from Feb. 2020 to June 2020 during the Coronavirus pandemic when M2 jumped from $15.3 trillion to $18 trillion. Other large increases have also coincided with economic weakness, during which expansionary monetary policy was deployed by the central bank.
What Is the Value of M2 Now?
The M2 was $20.8 trillion in March 2024. That's how much cash Americans had in their wallets, checking accounts, and short-term savings accounts.
What Happens When the M2 Money Supply Increases?
When there is more cash out there, more cash is spent. A little more can be good. A lot more can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when the inflation rate rises—it is trying to slow down spending to control the inflation rate.
Is M2 a Leading Economic Indicator?
M2 is seen as a reliable predictor of inflation, so it might be counted among the leading economic indicators. M3 is considered by some economists to be an even better predictor of inflation. This is published quarterly rather than monthly and includes data on large liquid assets held by financial institutions.
The Bottom Line
The Federal Reserve isn't keeping track of how much cash you've got in your wallet, but it has a pretty good idea of how much cash we (as a population) have at any given time. The important point isn't the number but how the number is increasing or decreasing from month to month. Too much cash is seen as a warning sign of a growing threat of inflation.
FAQs
M2 is the U.S. Federal Reserve's estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs).
What is the M2 definition of the 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.
What is the M2 definition of the 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 difference between the M2 and M2+ definitions of the money supply? ›
M2 represents currency outside banks plus bank personal deposits, banks non personal demand and notice deposits, less interbank deposits plus continuity adjustments. M2+ represents M2 plus deposits at trust and mortgage loan companies and at government saving institutions, deposits and shares at credit unions, etc.
What is included in the M2 definition of the 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.
Why is the M2 important? ›
M2 is closely monitored by the Federal Reserve, as it provides an indication of the level of economic activity and inflationary pressures in the economy. If there is a significant increase in M2, it could signal that the economy is growing, and there is more money available for investment and spending.
What is the difference between the M1 and M2 definitions of the money supply quizlet? ›
M1 includes currency, traveler's checks, and money in checkable accounts, whereas M2 includes M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.
What is an example of M2 money supply? ›
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 an example of M2? ›
Historically, M1 money supply included those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks, while M2 money supply included those monies that are less liquid in nature; M2 included M1 plus savings and time deposits, certificates of deposits, and money market funds.
What is the definition of money supply M1 M2 M3? ›
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.
The drop stems mostly from changes in Fed policy and rising interest rates, but it says little about the prospects for inflation or the likelihood of recession, according to Goldman Sachs Research.
What is the difference between M2 and M4 money supply? ›
Narrow Money (M2): Post Office Savings, Bank Savings Deposits added to M1 equals M2. Broad Money (M3): M3 equals M1 plus time deposits made with banks. Broad Money (M4): M4 is equal to M3 plus any deposits made at post office savings banks.
What is the meaning and components of money supply? ›
Money supply means the total stock of money in circulation among the people at a particular point of time in an economy. The supply of money is comprised of two components that include currency and demand deposits available with banks.
Which following is not part of the M2 money supply? ›
Answer and Explanation:
Credit cards are not actually a form of money because they are just a promise to pay. M2 is made up of: M1 (Checkable bank deposits, Currency in circulation, and Traveler's checks). Money market funds.
Which of the following items are included in money supply M2 but not? ›
The M2 component of money supply includes savings deposits, including money market deposit accounts, small-denominated (less than $100,000) time deposits, money market mutual funds held by individuals, plus the M1. Therefore, currency held by banks is not included in any of the components.
What near monies are included in the M2 money supply? ›
The M2 money supply includes near money and has intermediate nearness. It includes everything in M1, plus savings deposits, time deposits under $100,000, and retail money market funds.
What is M2 vs M1? ›
What are the differences between the M1 and M2 chips? As you might have guessed, performance is the main difference between the M1 and M2 chips. For example, the M2 CPU is 18% faster than the M1, the GPU is 35% faster, and the neural engine is 40% faster. There are other improvements as well.
What is the difference between M1 and M2 money supply and how they are measured? ›
Money is measured with several definitions: M1 includes currency and money in checking accounts (demand deposits). Traveler's checks are also a component of M1, but are declining in use. M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds.
What is M1, M2, M3, M4 money? ›
Additional Information
| Mo(Reserve Money) | Currency in circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI |
|---|
| M2 | M1 + Savings deposits with Post office savings banks |
| M3 (Broad Money) | M1+ Time deposits with the banking system |
| M4 | M3+ All deposits with the post office savings banks. |
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