M1 and M2
What is M1 and M2?
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.
M1 and M2: a worked example
A hypothetical economy reports currency held by the public of $220 billion, checkable deposits of $480 billion, savings deposits of $900 billion, small time deposits of $150 billion, and retail money market fund balances of $70 billion. M1 = $220 + $480 = $700 billion. M2 = M1 plus the three near money items, so M2 = $700 + $900 + $150 + $70 = $1,820 billion. Now households shift $50 billion out of savings and into checking. M1 rises to $750 billion, while M2 holds at $1,820 billion because those funds were already counted inside it. Vault cash and large institutional time deposits belong to neither measure.
The mistake students make with m1 and m2
The frequent error is double counting, adding M1 to a list that already contains M1 and reporting an M2 twice as large as it should be. Write M2 as M1 plus near money, then add each near money item exactly once. The other classic slip is putting credit card limits in the money supply. A credit line is borrowing capacity, not an asset anyone holds, so it enters neither measure. Large institutional time deposits also stay outside M2, which counts only small denomination time deposits.
M1 and M2 questions
What is the difference between M1 and M2?
M1 counts the most liquid money, currency held by the public plus checkable deposits, the funds spendable right now. M2 counts everything in M1 plus near money such as savings deposits, small time deposits, and retail money market funds. Near money must be converted before it can be spent, so M2 is always larger than M1. With $700 billion of M1 and $1,120 billion of near money, M2 equals $1,820 billion.
Does moving money from savings to checking change M2?
Moving funds from a savings account into a checking account leaves M2 unchanged. Savings deposits and checkable deposits both sit inside M2, so the transfer only shuffles money between two components of the same total. M1 does rise, because checkable deposits count in M1 while savings deposits do not. A $50 billion transfer lifts M1 by $50 billion and leaves M2 flat.
Are credit cards counted in the money supply?
Credit cards count in neither M1 nor M2. A card gives access to a loan, and the money supply measures assets people hold, not borrowing capacity a lender has promised. When a purchase is charged, the card issuer pays the merchant with deposits that already exist, so no new money enters circulation. Debit cards differ, since they draw on a checkable deposit already counted in M1.
Formula / Example
This is the live Money Market sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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