Series 65: 1.2.1.1. Monetary Aggregates

1.2.1.1. Monetary Aggregates

In the U.S., there are three different measures of the money supply: M1, M2, and M3. These are referred to as monetary aggregates, and they are used by the Federal Reserve to measure the effects of monetary policy. Economists and the Fed also use monetary aggregates to judge how fast the money supply is growing. If the money supply is growing too fast, it could be an indication of future inflation. The Fed may attempt to thwart potential inflation by reducing the supply of money and raising interest rates.

M1 is physical money, which includes notes and coins in circulation, as well as funds that can be spent immediately, such as checking and other accounts against which checks can be written (called demand deposits). M1 also includes travelers’ checks. It is the narrowest measure of the money supply that is tracked by economists.

M2 includes M1 and adds other monies that cannot be spent on demand, such as savings accounts, short-term money market accounts, and time deposits (CDs) of less than $100,000. M2 is much larger than M1. The Federal Reserve Bank publishes M1 and M2 figures every Thursday at 4:30 p.m. ET.

M3 adds longer term time deposits and institutional money market accounts to M2. The Federal Reserve Bank no longer publishes statistics on M3 because it thinks the statistic does not convey enough additional information about economic activity beyond that of M2 to merit its continued use.

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