Explain why you think the Federal Reserve Bank tracks M1 and M2.

M1 and M2 are two measures of the money supply in an economy. M1 is a narrow measure that includes only the most liquid assets, such as currency, demand deposits, traveler's checks, and other checkable deposits. M2 is a broader measure that includes not only M1, but also near money, which are relatively liquid financial assets, such as savings deposits, money market funds, and other time deposits.

Both M1 and M2 are important for understanding an economy's financial health. M1 provides information about the liquidity of assets, while M2 is a measure of overall money supply, which can impact inflation, interest rates, and economic growth. By tracking M1 and M2, the Federal Reserve can assess the prevailing monetary conditions in the economy and make informed decisions about monetary policy.

The Federal Reserve is responsible for conducting monetary policy and maintaining financial stability in the United States. Monitoring M1 and M2 allows the Federal Reserve to understand the growth of money supply and the liquidity of assets, which are crucial factors in formulating its monetary policy. By keeping track of these indicators, the Fed can determine if its policy measures are having the desired effects on the economy, such as controlling inflation, promoting employment, and supporting economic growth.

The Federal Reserve uses various tools to affect the money supply, such as open market operations, the discount rate, and reserve requirements. Changes in M1 and M2 can be the result of these policy actions. For example, when the Fed buys government securities through open market operations, it increases the reserves of banks, which can then lend more, leading to an increase in M1 and M2. By tracking M1 and M2, the Fed can gauge the effectiveness of its monetary policy actions and adjust its policies accordingly. In conclusion, the Federal Reserve tracks M1 and M2 because they are important indicators of the money supply in the economy and crucial for formulating and evaluating monetary policy actions. Monitoring these measures helps the Fed maintain financial stability, promote economic growth, and manage inflation.