Monetary Aggregates
Candlefocus EditorThe primary form of a monetary aggregate is the total money supply. This includes all the money circulating in the economy, including physical cash, deposits in bank accounts, and certificates of deposit. It is also known as the money stock. The money supply can also be broken down into narrower categories, such as M1 (narrow money) and M2 (broad money).
M1 is a measure of the money available for immediate spending in the form of deposits in banks and investments in money markets. It includes coins, currency, and checking and savings deposits. This can also be referred to as “cash money” since it is liquid and can be converted into physical cash for immediate usage. It does not include larger investments, such as certificate of deposits, mutual funds, and other forms of investments.
M2 measures the amount of money that is available for both immediate and future use. This metric includes M1 as well as saving and time deposits, money market funds, and other forms of investments.
The Federal Reserve and other monetary authorities use the monetary aggregates to assess the money supply and the impact of open-market operations on the economy. In general, open-market operations are actions taken by the Federal Reserve or other monetary authorities to adjust the amount of money in the economy through the buying or selling of financial assets. These operations can help to reduce or increase the money supply and stimulate or suppress economic activity. By measuring the money supply, monetary authorities can check the effects of their open-market operations to determine if these operations are having the desired effect.
In conclusion, monetary aggregates are an important metric for measuring the money supply in the economy, as well as the impacts of open-market operations. By closely tracking the money supply and its various components, policymakers can ensure that the effects of their operations are as efficient and effective as possible.