What Is Money Supply, and How Does It Affect the Economy?

Question: What Is Money Supply, and How Does It Affect the Economy?

Answer: There are two money supply measures, M1 and M2, that are measured by the Federal Reserve:

• M1 measures currency, travelers checks, and checking account deposits.
• M2 includes M1, savings accounts, time deposits under $100,000, and money market mutual funds (except those held in IRA's). In September 2008, it was $7.7 trillion.

In September 2008, M1 was $1.7 trillion and M2 was $7.7 trillion. Both measures increased about 6% in the last year.

Neither M1 nor M2 measures the amount of money invested in stock or bond funds, which most people now use for investments rather than savings accounts. For that reason, they are not really good indicators for tracking total wealth in the economy. (Source: Federal Reserve Bank of New York, The Money Supply)