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.
Definition: M2 is an estimate of the total money supply by the Federal Reserve System, including all cash in people's hands, and funds deposited in checking accounts, savings accounts, and other short-term savings instruments (such as time deposits). It does not include retirement account balances and time deposits over $100,000.
Origin: The concept of M2 originated from the study and monitoring of the money supply. In the early 20th century, as economists and policymakers gained a deeper understanding of the impact of the money supply on the economy, different levels of money supply classification gradually formed. M2, as an important money supply indicator, helps policymakers better understand and regulate the economy.
Categories and Characteristics: M2 includes the following categories: 1. Cash and funds in checking accounts; 2. Funds in savings accounts; 3. Time deposits (not exceeding $100,000); 4. Funds in money market funds. The characteristics of M2 are that it has high liquidity, but not as high as M1. It reflects a more comprehensive view of a country's money supply than M1.
Specific Cases: 1. During an economic recession, the Federal Reserve may increase M2 to stimulate economic growth, such as lowering interest rates to encourage savings and investment. 2. When there is significant inflationary pressure, the Federal Reserve may take measures to slow the growth of M2, such as raising interest rates to reduce borrowing and consumption.
Common Questions: 1. Why does M2 not include retirement account balances? Because these funds are typically not immediately available for consumption. 2. What is the difference between M2 and M1? M1 mainly includes the most liquid forms of money, while M2 includes more savings instruments with lower liquidity.
