What components of money do we count in M2?

M2 is a measure of the money supply that includes a wider range of financial assets than the more basic measure, M1. M2 is used by economists and policymakers to understand the total amount of money in circulation within an economy and its potential impact on economic stability and growth.

Before we discuss the specific components of M2, it's essential to understand the components included in the more basic measure, M1. M1 includes the following components: 1. Currency in circulation: This includes all paper money and coins that are in the hands of the public. 2. Demand deposits: These are checking account balances held at banks and financial institutions. 3. Traveler's checks: A small portion of the money supply, traveler's checks are pre-printed, fixed-amount checks that can be used as a cash substitute.

Now that we have established the components of M1, let's discuss the additional components that are included in M2. M2 consists of all the components of M1, plus the following components: 1. Savings deposits: These are interest-bearing deposit accounts held at banks and financial institutions. They include regular savings accounts, money market deposit accounts, and other types of accounts with limited transactions allowed. 2. Small denomination time deposits: These are interest-bearing deposits with a value of less than $100,000 and a specified maturity date. Examples include certificates of deposit (CDs) and other similar instruments. 3. Retail money market mutual funds: These are funds that invest in short-term debt instruments, such as Treasury bills, commercial paper, and repurchase agreements. Retail money market mutual funds are primarily held by individual investors.

In conclusion, the components of M2 money supply measure include: 1. Currency in circulation 2. Demand deposits 3. Traveler's checks 4. Savings deposits 5. Small denomination time deposits 6. Retail money market mutual funds By understanding the components of M2, economists and policymakers can better assess the total amount of money in an economy and its potential impact on various economic indicators, such as inflation, growth, and employment.