M1 and M2 vs Monetary Base (High-Powered Money)
M1 and M2 and Monetary Base (High-Powered Money) are two Money & Monetary Policy concepts in AP Economics that students often mix up. In short: m1 and m2 is m1 and M2 are measures of the money supply; M1 is the most liquid money and M2 includes M1 plus less-liquid near-money. Meanwhile, monetary base (high-powered money) is the monetary base, or high-powered money, is currency in circulation plus bank reserves, the money the central bank directly controls. Here is how they compare side by side.
M1 and M2 are measures of the money supply; M1 is the most liquid money and M2 includes M1 plus less-liquid near-money.
M1 covers currency and checkable deposits. M2 adds savings deposits, small time deposits, and retail money market funds. M1 is used directly for transactions, while M2 captures money that can be spent after conversion.
The monetary base, or high-powered money, is currency in circulation plus bank reserves, the money the central bank directly controls.
It is called 'high-powered' because each dollar of base can support a larger change in the broader money supply through the multiplier as banks lend. The base differs from M1/M2: it includes bank reserves (not in M1) but excludes the deposit expansion that reserves enable. The Fed changes the base mainly through open market operations.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime.