Currency represents about how much of m1

For example, some savings accounts will allow depositors to write checks, use automatic teller machines, and pay bills over the Internet, which has made it easier to access savings accounts. As with many other economic terms and statistics, the important point is to know the strengths and limitations of the various definitions of money, not to believe that such definitions are as clear-cut to economists as, say, the definition of nitrogen is to chemists.

Thus, a debit card is every bit as much money as a check. It is important to note that in our definition of money, it is checkable deposits that are money, not the paper check or the debit card. Although you can make a purchase with a credit card , it is not considered money but rather a short term loan from the credit card company to you.

When you make a purchase with a credit card, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card bill, you have effectively borrowed money from the credit card company.

With a smart card , you can store a certain value of money on the card and then use the card to make purchases. In short, credit cards, debit cards, and smart cards are different ways to move money when a purchase is made. But having more credit cards or debit cards does not change the quantity of money in the economy, any more than having more checks printed increases the amount of money in your checking account.

One key message underlying this discussion of M1 and M2 is that money in a modern economy is not just paper bills and coins; instead, money is closely linked to bank accounts. Indeed, the macroeconomic policies concerning money are largely conducted through the banking system.

Practice until you feel comfortable doing the questions. Improve this page Learn More. Skip to main content. Module Money and Banking.

Search for:. Try It. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank. Many banks and other financial institutions also offer a chance to invest in money market funds , where they pool together the deposits of many individual investors and invest them in a safe way, such as short-term government bonds.

In short, all these types of M2 are money that you can withdraw and spend, but which require a greater effort to do so than the items in M1. Figure should help in visualizing the relationship between M1 and M2. Note that M1 is included in the M2 calculation. The Federal Reserve System is responsible for tracking the amounts of M1 and M2 and prepares a weekly release of information about the money supply.

Figure provides a breakdown of the portion of each type of money that comprised M1 and M2 in February , as provided by the Federal Reserve Bank. The lines separating M1 and M2 can become a little blurry. Sometimes businesses do not treat elements of M1 alike. Changes in banking practices and technology have made the savings accounts in M2 more similar to the checking accounts in M1. For example, some savings accounts will allow depositors to write checks, use automatic teller machines, and pay bills over the internet, which has made it easier to access savings accounts.

As with many other economic terms and statistics, the important point is to know the strengths and limitations of the various definitions of money, not to believe that such definitions are as clear-cut to economists as, say, the definition of nitrogen is to chemists. It is important to note that in our definition of money, it is checkable deposits that are money, not the paper check or the debit card.

Although you can make a purchase with a credit card , the financial institution does not consider it money but rather a short term loan from the credit card company to you. When you make a credit card purchase, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card bill, you have effectively borrowed money from the credit card company.

With a smart card , you can store a certain value of money on the card and then use the card to make purchases. In short, credit cards, debit cards, and smart cards are different ways to move money when you make a purchase.

However, having more credit cards or debit cards does not change the quantity of money in the economy, any more than printing more checks increases the amount of money in your checking account. One key message underlying this discussion of M1 and M2 is that money in a modern economy is not just paper bills and coins.

Instead, money is closely linked to bank accounts. Billions of dollars unless otherwise noted. Before May , M1 consists of 1 currency outside the U. Treasury, Federal Reserve Banks, and the vaults of depository institutions; 2 demand deposits at commercial banks excluding those amounts held by depository institutions, the U. Beginning May , M1 consists of 1 currency outside the U. Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs before May or other liquid deposits beginning May , each seasonally adjusted separately.

For more information on the H. Seasonally adjusted M2 is constructed by summing savings deposits before May , small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Currency in circulation consists of Federal Reserve notes and coin outside the U. Treasury and Federal Reserve Banks.