| Definition |
The narrowest measure of money supply, representing the most liquid forms of money. |
A broader measure of money supply that includes M1 plus near-money assets. |
| Components |
Currency in circulation + demand deposits + other checkable deposits + traveler's checks. |
M1 components + savings deposits + time deposits (under $100,000) + retail money market mutual funds. |
| Liquidity |
Highly liquid; can be used immediately for transactions. |
Less liquid than M1 but can be converted to cash relatively quickly. |
| Purpose |
Measures money readily available for spending in the economy. |
Measures money available for spending plus money stored in savings and small time deposits. |
| Includes Savings Accounts? |
No, savings accounts are excluded. |
Yes, savings accounts are included. |
| Includes Time Deposits? |
No. |
Yes, includes small-denomination time deposits. |
| Use by Policymakers |
Used to assess immediate spending capacity and liquidity in the economy. |
Used to analyze broader money supply and potential spending power. |
| Significance |
Indicates short-term economic activity and transaction levels. |
Shows potential future spending and saving behaviors. |
| Volatility |
More volatile due to high liquidity and daily transactions. |
Less volatile as it includes longer-term deposits. |
| Impact on Inflation |
Changes in M1 can have immediate effects on inflation. |
M2 changes indicate medium-term inflation trends. |
| Measurement Frequency |
Reported frequently by central banks. |
Also reported frequently but considered less responsive. |
| Examples |
Currency notes, coins, checking accounts balances. |
All M1 items plus savings accounts, certificates of deposit. |
| Role in Economy |
Reflects money used in everyday transactions. |
Reflects total money accessible for transactions and savings. |
| Influence on Interest Rates |
More directly affected by monetary policy tools like reserve requirements. |
Influenced by broader economic factors including savings behavior. |
M1 vs M2 Money Supply