What Are M0, M1, and M2 in Money Supply?

TL;DR

M0 represents base money, the physical currency and reserves held by central banks. M1 includes M0 plus checkable deposits like checking accounts, while M2 encompasses M1 along with easily convertible assets like savings accounts. Understanding these measures is key to grasping economic activity and the role of monetary policy.

Transcript

What I want to explore in this video is the different ways of measuring the amount of money we have in circulation. So we're going to start things with our Central Bank in the US. This would be the US Federal Reserve. And let's say that they print $4. And we're going to focus, just for visualization purposes, on that they're doing it physically. Th... Read More

Key Insights

• 🤑 The money supply can be measured in different ways, including base money (M0), narrow money (M1), and broad money (M2).
• 🤑 Physical currency and checkable deposits are part of narrow money (M1), representing easily usable forms of money.
• 🤑 Savings accounts and other assets that can be converted to M1 are included in broad money (M2).
• 💵 The money supply affects economic activity and is influenced by the actions of central banks and commercial banks.
• 💵 The fractional reserve system allows banks to lend out a portion of the deposits they receive, increasing the overall money supply.
• 🤑 Different countries may have variations in their definitions and measurements of the money supply.
• 🤑 The money supply is an important factor considered by policymakers in managing inflation and stabilizing the economy.

Questions & Answers

Q: What is base money?

Base money refers to the physical currency printed by the central bank and the electronic reserves of its member banks. In this example, the $4 printed by the US Federal Reserve is base money.

Q: What is narrow money (M1)?

Narrow money includes physical currency held by the public and checkable deposits that can be used for transactions. In this example, M1 would be $7 (physical currency + check writing capabilities).

Q: What is broad money (M2)?

Broad money includes M1 and other assets that can be easily converted to M1, such as savings accounts. In this example, M2 would be $9 (M1 + savings accounts).

Q: How does the money supply affect the economy?

The money supply plays a crucial role in influencing economic activity. Changes in the money supply can impact interest rates, inflation, and overall economic growth.

Summary & Key Takeaways

• The US Federal Reserve prints $4 in physical currency and buys safe and liquid securities in the open market.

• The purchased securities are deposited in a private bank, where $3 is kept in a checking account and $1 is placed in a savings account.

• The private bank can lend out $2, which is deposited in another private bank, and the process repeats, with money being transferred between banks and individuals.