Loading the player...

What is 'M2'

M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.

BREAKING DOWN 'M2'

M2 is a broader money classification than M1, because it includes assets that are highly liquid but are not cash. A consumer or business typically doesn't use savings deposits and other non-M1 components of M2 when making purchases or paying bills, but it could convert them to cash in relatively short order. M1 and M2 are closely related, and economists like to include the more broadly defined definition for M2 when discussing the money supply, because modern economies often involve transfers between different account types. For example, a business may transfer $10,000 from a money market account to its checking account. This transfer would increase M1, which doesn’t include money market funds, while keeping M2 stable, since M2 contains money market accounts.

The Money Supply

The money supply measures the amount of monetary assets available in an economy. This is an important metric in macroeconomics, because it can dictate inflation and interest rates. Inflation and interest rates have major ramifications for the general economy, as these heavily influence employment, consumer spending, business investment, currency strength and trade balances. In the United States, the Federal Reserve publishes money supply data every Thursday at 4:30 p.m., but this only covers M1 and M2. Data on large time deposits, institutional money market funds and other large liquid assets are published on a quarterly basis, and are included in the M3 money supply measurement.

Changes in Money Supply

In the United States, M2 has grown along with the economy, rising from $4.6 trillion in January 2000 to $12.8 trillion in June 2016. The supply never shrank year-over-year (YOY) at any point in that period. The most extreme growth occurred in September 2001, January 2009 and January 2012, when the rate of M2 expansion topped 10%. These accelerated periods coincided with recessions and economic weakness, during which expansionary monetary policy was deployed by the central bank. As of March 2018, the United States' M2 money supply totaled $13.86 trillion. 

In response to economic weakness, central banks often enact policy that increases the money supply, promotes inflation and reduces interest rates. This creates incentive for businesses to invest and for consumers to maintain their purchase activities. The Phillips Curve illustrates an inverse relationship between interest rates and unemployment, and the Federal Reserve's mandate is to balance these two important macroeconomic statistics. M2 provides important insight into the direction, extremity and efficacy of central bank policy.

RELATED TERMS
  1. Money Supply

    The money supply is the entire stock of currency and other liquid ...
  2. M3

    M3 is a measure of money supply that includes M2, large time ...
  3. Broad Money

    Broad money is an economics term that represents the calculation ...
  4. Velocity of Money

    The velocity of money is the rate at which people spend money. ...
  5. Multiplier Effect

    The multiplier effect is the increase in economic activity resulting ...
  6. Monetary Base

    A monetary base is the total amount of a currency in general ...
Related Articles
  1. Insights

    What is Money?

    Money: It's a part of everyone's life, and we all want it, but what is it, how does it gain value, and how it was created?
  2. Investing

    3 Reasons China's Slowdown Is Cause for Concern

    Some investors are predicting the collapse of China's economy propped up by its credit, currency and real estate markets.
  3. Personal Finance

    Where to Put Your Cash: Call Deposit vs. Time Deposit Accounts

    Time deposit accounts and call deposit accounts allow customers to earn higher interest in exchange for less access to their cash.
  4. Personal Finance

    5 Mistakes You're Making With Money Market Accounts

    Money market accounts can be helpful "parking spots" for investors. Here are five key things to keep in mind when opening an account.
  5. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  6. Insights

    How the Federal Reserve Manages Money Supply

    The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money.
  7. Insights

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  8. Taxes

    The Link Between The Fed, Money, Debt And Taxes

    Assets on the Fed's balance sheet, money supply level, national debt level and economic production should be maintained in equilibrium.
  9. Investing

    Money Market Mutual Funds: A Better Savings Account

    A good alternative to the traditional savings account is the money market mutual fund. It's easy, safe and has better returns. Learn more today.
RELATED FAQS
  1. Did the Federal Reserve's quantitative easing add to M1?

    The Fed printed trillions of dollars to fund quantitative easing, right? So what happened to M1? Read Answer >>
  2. What is the correlation between money supply and GDP?

    Read about the two-way correlation between the total amount of money circulating in the economy and gross domestic product, ... Read Answer >>
  3. Why do Bitcoins have value?

    Performing with transactional anonymity, Bitcoin has value as a private digital currency, investment tool and social networking ... Read Answer >>
  4. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
Trading Center