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.

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.