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The Monetary System

Defining the Money Supply: M1 and M2


M1 and M2

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Alright. So now let's define what we're going to call the money supply, what is the amount of money available for spending? Okay. So we're gonna have to draw the line somewhere in what's considered money and what's not considered money. Okay. And it's gonna be based on our previous definitions. So remember the money supply, just like I said, it's gonna be the amount of money available for spending, right? The amount of money available is the supply of money. So we're gonna have two different definitions for the money supply, but one of them is going to be more important for this course. Alright. So M1 is what we call the narrow definition of money because it it's a lot more conservative. It doesn't include many things, it's going to include the currency in circulation. So the actual dollars you have in your wallet right now uh dollars that are in the cash registers at at stores, right? This currency that's in circulation, this is going to be included in our money supply. So cash held by the public. And we're also going to include checking account deposits. So this is readily available, checking account balances and I want to make a note, not savings. So things that you could write a check or use your debit card to use that money and not credit cards either. Okay. Not credit cards, it would be a debit card is okay because it's pulling from your bank account from that readily available. But a credit card is a bit of a different story. So that's about it that's going to make up the majority of the M. One money supply. So M. One is just the currency in circulation and checking account deposits. There's also this I'm gonna draw tiny little three here because it barely makes up even like 30.1. If that percentage of this money supply is contributions from travelers checks as well. That's also included in this money supply. But generally what you're gonna have to remember is these first two currency in circulation and checking account deposits. Okay now let's go on to em too. They got great names for these things, right? M. One or M. Two. So if M. One is the narrow definition of the money supply. M. Two is going to be the broad definition of the money supply. Okay so this is going to include more stuff. It's gonna include everything in M. One. Plus we're gonna say more stuff as well. Okay, there's gonna be more stuff included in M. Two, M. One. Now you don't have to get into so much detail about what's included in M. Two. Generally you're just gonna have to remember that M. Two is bigger than M. One. It's a bigger broader definition of what's in the money supply. It's gonna include those savings accounts that were not included in M. One up here. We didn't include savings, it's gonna include money market accounts which is another type of savings account that pays interest, similar kind of thing, certificates of deposit. This is another type of savings where your savings are kind of locked away for a certain time period, but you learn more interest money market mutual fund deposits. Another uh interest gaining deposit account with uh with a good amount of liquidity and then a bunch of other small categories. So for the most part you don't really need to know too much about em too because M. One is the focus in this class. We're gonna be using M. One specifically when we're when we're dealing with um the money supply in this class. Just because it's a little easier to use. But just so you know, just so you can see the difference between M. One and M. Two. And the implication it would have on calculations M. Two is approximately 4 to 5 times larger than M. One. So there's a lot more included M. Two than an M. One. So let's look at two different points in time. What's in the amount of M. One and M. Two. So here we see in December 2013, we see approximately uh 2.2, that's $2.6 trillion M1. Where we have almost 11 trillion in M. Two over here. Right? And you can see what's included notice. Traveler's checks are not even barely anything here. There's 0% very small amount where checkable bank deposits and currency in circulation, right? These were two main parts of M. One that make up the significant portions of M. One there, and then M. Two has noticed right here is M. One plus all this other stuff. So look how much more is being added savings deposits making up a big portion of it. So M. Two being a lot bigger than M. One. And down here we have another estimate from july 2015 where we can see M. One and M. Two where it's approximately four times bigger in this situation, but many of the same things we can see savings is another. Again, the biggest portion of M. Two here, and we've got em one as a portion of M. Two plus a bunch of other stuff. Cool. So remember M one is gonna be the important one in this class, but you still need to know the definition of M. Two. Um So let's go ahead and move on to.