M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.
Economists use M followed by a number to designate certain portions of the money supply.
There are two definitions of money: M1 and M2 money supply.
M2 is a broader measure of the money supply that M1, which just includes cash and checking deposits.
M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.
The exact use of this indicator of money supply varies between economies.
In the US, M1 is the total amount of cash and checking account balances.
M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that the U.S. Treasury does not hold at the Federal Reserve Bank, or in bank vaults.
Closely related to currency are checkable deposits, also known as demand deposits. These are the amounts held in checking accounts.
They are called demand deposits or checkable deposits because the banking institution must give the deposit holder his money “on demand” when you write s a check or uses a debit card.
These items together: currency, and checking accounts in a bank: comprise the definition of money known as M1, which the Federal Reserve System measures daily.
A broader definition of money, M2 includes everything in M1 but also adds other types of deposits.
M2 includes a broader set of financial assets held principally by households.
M2 consists of M1 plus:
- Savings deposits (which include money market deposit accounts, or MMDAs).
- Small-denomination time deposits (time deposits in amounts of less than $100,000).
- Balances in retail money market mutual funds (MMMFs).
Broadly, M2 is widened to include money that is not completely liquid, but that can be quickly converted into cash or back into current accounts.
This can often be referred to as “near money“.
In the UK, M2 is not typically used and M4 is the key indicator.