Random Fact

From 1979 to 2010, on an inflation-adjusted basis, earnings for women with a college degree have increased by 33 percent, while those of male college graduates have risen by 20 percent (http://www.bls.gov/opub/ted/2011/ted_20110722.htm). 

Section 2: Money Supply Measures PDF Print E-mail
Macroeconomics - Unit 9

Money in Circulation

 

In the United States, the Federal Reserve System and its twelve central banks are responsible for the circulation of money. In most other countries, a single central bank controls the amount of money in circulation. In Europe, the European System of Central Banks controls the money supply for the countries that belong to the European Union. In this unit, we will discuss the most common measures of our money supply, which include the Monetary Base, M-1, M-2, and M-3.

The Monetary Base

The Monetary Base, or so-called high powered money, includes bank reserves plus currency in the hands of the non-bank public. Bank reserves are funds held by banks and are not in circulation with the public. Bank reserves include physical or electronically recorded cash balances held by banks. Currency consists of banknotes (paper money) issued through the Federal Reserve, and coins minted by the United States Mint (part of the United States Treasury).

The monetary base is not the same as what economists refer to as the money supply. The monetary base includes funds held by banks. This money does not necessarily get spent on the purchases of goods and services (especially if the money does not get loaned out) and therefore does not necessarily affect economic activity. The money supply measures described in the next paragraph more directly affect economic activity, because they include funds held by the public (households and non-bank businesses). There are three money supply measures; the first two are most commonly monitored and manipulated by the Federal Reserve for policy decision-making purposes.

Official United States Money Supply Measures

The three official money supply measures in the United States are

1. M-1.

M-1 includes all coins and currency in circulation with the public + money in checking or transactions accounts (demand deposits, NOW accounts, and other checkable deposits) + traveler's checks and money orders.

A characteristic of M-1 is that it includes money, which you can easily use to purchase goods and services. It, therefore, directly affects economic activity. Credit card payments and balances are not included in M-1. When you pay by credit card, you are borrowing money, and not actually paying for the item you purchased. The money from your transactions account that you use to pay your credit card balance (or part of it) at the end of each month is included in M-1. The amount of money in M-1 has increased from $140 billion in 1960 to more than $2,600 billion in January of 2014.

2. M-2.

M-2 includes everything in M-1 + savings deposits (amounts less than $100,000) + money market mutual funds + money market deposit accounts + other short-term money market investments. Government policy-makers have shifted their focus on M-2 instead of M-1 for monetary policy decision-making. The deregulation of the banking industry has made the components in M-2 more liquid, and more people use funds within M-2 to purchase goods and services. M-2 has increased from approximately $300 billion in 1960 to approximately $11,000 billion ($11 trillion) in January of 2014.

3. M-3.

M-3 includes everything in M-2 + Large Time Deposits + Repurchase Agreement (RPs) + Eurodollars + Institution-held Money Market Mutual Funds.

Large time deposits are savings accounts with more than $100,000 in each account. Repurchase agreements are forms of savings with collateral (using Treasury securities) backing the loan. Eurodollars are dollar-denominated savings in foreign banks. Institution-held money market mutual funds are savings accounts with a high interest rate held by financial institutions, retirement companies, and insurance companies. The additional forms of money in M-3 are less liquid (not easily exchanged for cash) than the forms of money in M-1 and M-2. M-3 statistics are not followed as closely by economists as M-1 and M-2. Consequently, the Federal Reserve has recently stopped publishing data on M-3.

For historical and up-to-date information on the above-mentioned money measures, please click HERE.

Last Updated on Monday, 30 December 2013 09:47