EconixaECONOMICS FUNDAMENTALS

M2 Money Supply

Plain definition

A broader measure of the money supply than M1: M1 plus savings deposits, small time deposits, and retail money market fund balances.

In economics

M2 adds near-money assets that are less liquid than checking deposits but easily converted for spending. It is the most commonly cited money-supply measure for assessing liquidity and inflation risk, because it captures funds households could quickly mobilize.

Example

A household keeps 3,000inchecking(M1),3,000 in checking (M1), 20,000 in a savings account, and 10,000inamoneymarketfund.All10,000 in a money market fund. All 33,000 counts in M2; only the 3,000incheckingcountsinM1.Iftheymove3,000 in checking counts in M1. If they move 5,000 from savings to checking, M1 rises but M2 is unchanged.

Common confusion

M2 is confused with M1. M1 covers only transaction money; M2 adds savings-like balances. A policy that makes savings accounts more attractive (higher rates) may raise M2 without changing M1, which is why economists track both measures separately.