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Money supply refers to the total amount of monetary assets available in an economy at a given time, which influences inflation, interest rates, and economic growth. Central banks, like the Federal Reserve in the US, track it through various aggregates (M0, M1, M2, etc.) that reflect different levels of liquidity—how easily assets can be converted to cash for spending. These measures help policymakers gauge economic health and adjust monetary policy accordingly.
M0, also known as the monetary base or high-powered money, is the narrowest measure. It includes only physical currency in circulation (coins and notes) plus reserves held by commercial banks at the central bank. M0 represents the foundation of the money supply, as it can be multiplied through fractional reserve banking to create broader money.
M1 expands on M0 by including highly liquid assets that can be used immediately for transactions. This typically encompasses demand deposits (checking accounts), traveler's checks, and other checkable deposits. M1 is crucial for measuring money readily available for everyday spending and is often used to assess short-term economic activity.
M2 builds on M1 by adding less liquid but still accessible savings instruments, such as savings accounts, money market deposit accounts, small time deposits (under $100,000), and retail money market mutual funds. It provides a broader view of money that households and businesses can quickly convert to spendable forms, making it a key indicator for inflation predictions.
M3, the broadest commonly used measure (though some countries like the US discontinued tracking it officially), includes M2 plus large time deposits, institutional money market funds, and other large liquid assets. Broader aggregates like M4 exist in some systems, incorporating even more instruments, but they are less standardized globally. Understanding these tiers helps explain how money creation and velocity impact an economy's stability.
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