. How to Calculate M1 Money Supply What are the four measures of money supply? M0: Physical currency in circulation, plus deposits at central bank
M1: M0 plus checking account deposits
M2: M1 plus savings and money market account deposits
M3: M2 plus large-time deposits and institutional money market funds How is money supply measured and why? The Federal Reserve defines the money supply as currency in circulation plus reserves held by depository institutions plus the balance in the Federal Reserve's own accounts.
Currency in circulation includes all U.S. coins and paper currency in the hands of the public. It does not include money held in vaults by banks or other depository institutions.
Reserves held by depository institutions include all deposits held in reserve accounts at the Federal Reserve plus all currency and coin deposits, vault cash, and balances in all checking accounts at depository institutions.
The balance in the Federal Reserve's own accounts includes all currency and coin deposits, vault cash, and balances in all checking accounts at the Federal Reserve.
The money supply is important because it can affect the level of economic activity in the economy. If the money supply is too low, economic activity can slow down. If the money supply is too high, inflation can occur.
What is M1 Federal Reserve?
M1 is the Federal Reserve's measure of the U.S. money supply. M1 includes all physical currency, such as bills and coins, as well as all demand deposits, which are deposits that can be withdrawn on demand. M1 also includes other types of deposits that can be converted into cash or used to make payments within a short period of time.
What causes M1 to increase?
There are several factors that can cause the M1 money supply to increase. One is if the Federal Reserve increases the reserve requirement, which is the amount of money that banks must hold in reserve. This increases the amount of money that banks have to lend, and thus the money supply. Another factor is if the Federal Reserve decreases the discount rate, which is the interest rate it charges banks for loans. This decreases the cost of borrowing for banks, and thus increases the money supply. What is difference between M1 and M2? M1 consists of currency in circulation, traveler's checks, demand deposits, and other checkable deposits. M2 consists of M1 plus savings deposits, time deposits less than $100,000, and money market mutual fund shares.