What is M-2 money supply?

M-2 money supply is a measure of the money supply that includes all of the assets included in M-1 (which includes cash, checking deposits, and traveler's checks) and additional assets such as savings deposits, money market securities, and other time deposits. M-2 is considered a broader measure of money supply than M-1 and M-0, as it includes less liquid assets that are not as easily converted into cash. It is considered a more reliable indicator of the money supply and economic activity than M-0 or M-1.

M-2 money supply is important because it provides a more complete picture of the money supply than M-0 or M-1. For example, M-2 includes savings deposits and money market securities, which can be a significant source of funds for businesses and individuals, and are not included in M-0 or M-1. The inclusion of these assets in M-2 money supply helps central banks understand how much money is available for borrowing and spending, which can provide insights into the overall health of the economy.

Central banks use M-2 money supply as an indicator to guide monetary policy decisions, such as interest rate adjustments and open market operations. The central bank may choose to increase the money supply to promote economic growth or decrease the money supply to curb inflation. The target of the monetary policy is to maintain a balance of low inflation, full employment, and stability in the financial system.

It's worth noting that the money supply measures, like M-2, do not include all forms of wealth and assets in the economy, they are still a useful tool for central banks to understand the money that is available and actively circulating in the economy.

History OF M-2 money supply

M-2 money supply is a broader measure of the money supply that includes assets such as savings deposits, money market securities, and other time deposits in addition to cash, checking deposits, and traveler's checks. The concept of M-2 money supply has been used by central banks since the 1970s to provide a more comprehensive view of the money supply. The Federal Reserve began publishing data on M-2 money supply in 1980. Since then, central banks around the world have used M-2 money supply as an important indicator of the money supply and economic activity. It is considered a more reliable indicator than M-1 or M-0, as it includes less liquid assets that are not as easily converted into cash. The use of M-2 money supply as a measure of money supply became more widespread in the 1970s, when economists and central bankers began to realize that other measures of money supply, such as M-1 and M-0, were not accurate indicators of monetary policy effectiveness.

Comprehensive view

M-2 money supply provides a more complete picture of the money supply than M-1 or M-0, as it includes less liquid assets such as savings deposits, money market securities, and other time deposits. This gives central banks a more accurate understanding of the amount of money available for borrowing and spending, which can provide insights into the overall health of the economy.

Better policies

Central banks use M-2 money supply as an indicator to guide monetary policy decisions, such as interest rate adjustments and open market operations. This allows them to make more informed decisions on how to maintain low inflation, full employment, and stability in the financial system.

reliable indicator

M-2 money supply is considered a more reliable indicator of the money supply and economic activity than M-1 or M-0, as it includes less liquid assets that are not as easily converted into cash.

Broader perspective

M-2 money supply provides a broader perspective on the economy by including savings deposits, money market securities and other time deposits which are a significant source of funds for businesses and individuals. This allows Central Banks to better understand the economy and make more informed decisions to stabilize it.