Three Measures of Money Supply
Three Measures of Money Supply
By Raphael Zeder | Last updated Jun 26, 2020 (Published Jun 15, 2017)
Money supply (i.e., money stock) is defined as the total quantity of money circulating in the economy at a particular time. Many countries commonly use it as an indicator of economic performance. However, in our financial system, money is not limited to cash anymore.
There are several other physical and intangible assets that perform many or all of the functions of money. Thus, depending on the scope we chose, the money supply can be larger or smaller. Therefore, most countries distinguish between at least three measures of money supply, M1, M2, and M3. We will look at each of them in more detail in the video and the text below.
M1 – Narrow Measure
M1 includes all currency (i.e., cash) in circulation, traveler’s checks, demand deposits at commercial banks (or other depository institutions) held by the public, and other checkable deposits. It is often referred to as the narrowest measure of money supply or narrow money. However, for the sake of completeness and to avoid confusion, please note that some countries also measure a similar, but even narrower money supply M0 (e.g., UK).
In the United States, the Federal Reserve reports M1 on a weekly and monthly basis. The reports always include a seasonally adjusted and a not seasonally adjusted value. Seasonal adjustment is a statistical technique that is designed to even out periodically recurring patterns that are due to seasonal changes in supply and demand. The idea behind this is to reveal non-seasonal changes that would otherwise be overshadowed by seasonal changes.
In May 2017, the Federal Reserve reported the US money stock M1 at USD 3,462.4 billion (not seasonally adjusted) and USD 3,428.7 billion (seasonally adjusted). Over the last few years, M1 has consistently increased. In fact, it has grown by 7.1 percent in just one year from April 2016 to April 2017.
M2 – Intermediate Measure
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