Prior to determining an appropriate economic policy, economists must have an idea of the amount of money that is in circulation, along with the amount of other types of assets that will provide access to cash. Economists gauge the money supply using three measures. They are:
M1 is the largest and most liquid measure of the nation’s money supply and it includes:
- Demand deposits (Checking accounts)
Includes all the measures in M1 plus:
- Money market instruments
- Time deposits of less than $100,000
- Negotiable CD exceeding $100,000
- Overnight repurchase agreements
Includes all of the measures in M1 and M2 plus
- Time deposits greater than $100,000
- Repurchase agreements with maturities greater than 1 day
Disintermediation occurs when people take their money out of low yielding accounts offered by financial intermediaries or banks and invest money in higher yielding investments.
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InvestingM1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
InsightsM2 is the part of the money supply economists use to analyze and predict inflation.
InvestingMoney supply – also called money stock -- refers to the total amount of currency and other liquid financial products in an economy at a particular time.
InvestingA demand deposit is any type of account where the money in the account may be withdrawn at any time without prior notice to the financial institution.
InsightsIt's a part of everyone's life, and we all want it, but do you know how it gains value and how it is created?
InsightsWe look at whether this financial practice benefits a government in the long term.
TradingCentral banks inject money into the banking system, and remove money from it, through monetary policy actions.
Personal FinanceTime deposit accounts and call deposit accounts allow customers to earn higher interest in exchange for less access to their cash.
TradingA larger money supply lowers market interest rates, while a smaller supply tends to raise them.