As an example, what are the most common measurements of money supply used by the Federal Reserve?
1 Answer
The Fed generally uses two measures, M1 and M2, where M1 is the most liquid form and M2 has a few items with slightly less liquidity.
Explanation:
The Federal Reserve is commonly referred to as "the Fed". (Not, "the Feds" -- those are FBI!)
M1 measures the money supply using only the most liquid forms of "money". M2 adds a few forms of "near money". The Fed also has a measure, M3, which adds a few forms of "near near money". The distinctions between the measures are based on the degree of liquidity. Liquidity in money refers to how quickly and easily one can exchange the asset without affecting its price. Obviously, currency is exchanged at exactly its own price at all times (except in foreign exchange), so it is the most liquid form of money.
From the Fed itself (http://www.federalreserve.gov/releases/h6/current/):
M1 consists of
(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions;
(2) traveler's checks of nonbank issuers;
(3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and
(4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.
Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.
M2 consists of M1 plus
(1) savings deposits (including money market deposit accounts);
(2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and
(3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.
Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
