What components of money do we count in M2?

Money supply is the total amount of monetary assets available in the economy at a particular point in time. It is an important factor for determining interest rates, inflation, and other macroeconomic variables. There are multiple ways to measure the money supply, including M1 and M2, which are progressively broader measures.

M1 is a narrower measure of the money supply and includes the most liquid forms of money. It consists of: 1. Currency in circulation: The physical money like coins and banknotes in the hands of the public. 2. Demand deposits: The funds held in checking accounts by commercial banks, which can be easily accessed and transferred through checks, ATMs, and debit cards, etc.

M2 is a broader measure of money supply and building upon M1, it also includes near-monies. Near-monies are financial instruments that can be quickly and easily converted into cash. M2 is generally more relevant for economic analysis as it includes more components of money. The components of M2 are as follows: 1. M1: As written above, M1 consists of currency in circulation and demand deposits. 2. Savings deposits: The funds that are held in banks' saving accounts, which usually do not have check-writing privileges but can be withdrawn easily through ATMs, transfers, or limited checks. 3. Small-denomination time deposits: Deposit accounts with balances less than $100,000, and with specified maturity dates, like certificates of deposit (CDs). These deposits can earn interest but have limited liquidity. 4. Money market mutual funds (MMMF) for retail investors: A type of financial instrument in which money is pooled from retail investors and invested by professionals, with the intention of earning interest for shareholders. These funds are easily redeemable on short notice. So, in summary, M2 consists of M1 (currency in circulation and demand deposits) plus savings deposits, small-denomination time deposits, and money market mutual funds for retail investors.