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OPEN ECONOMY: An economy with a great deal of foreign trade. At the extreme, a completely open economy is one that has no trade barriers. Most of the world's hundred-plus nations are relatively open, but much less than they could be because of a wide assortment of trade restrictions. The more an economy is open, the more dependent it is on happenings around the world.

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M2:

The medium-range monetary aggregate for the U.S. economy containing the combination of M1 (currency and checkable deposits) and short-term, small denomination near monies. M2 contains financial assets that either function directly as money for the U.S. economy or can be easily and quickly converted into money. The near monies added to M1 to derive M2 include savings deposits, certificates of deposit, money market deposits, and money market mutual funds. M2 is one of three monetary aggregates tracked and reported by the Federal Reserve System. The other two are designated M1 and M3.
M2 is a broader measure of the money supply for the U.S. economy that includes not only the assets directly used for transactions (currency and checkable deposits), but also highly liquid bank accounts used for short-term savings. Many economists and policy makers look to M2 as a better measure of the economy's money supply than M1.

Some Recent Numbers

M2
June 2004 (Billions)

ComponentAmount

M1$1,335.2
Near Monies4,957.5
Savings Deposits
and Money Market Deposits
3,408.3
Small Denomination
Time Deposits
792.2
Money Market
Mutual Funds
757.0

Total M2$6,292.7

The table to the right presents values for M2 and its two key components, M1 and near monies. While these numbers are likely to change as economic conditions change, they provide a bit of insight into the money supply.
  • First, in early 2004 M2 was running at just over $6.2 trillion. This was approximately $21,500 for every man, woman, and child in the United States. This average amount includes both spendable money (M1) and assorted savings accounts.

  • Second, about 20 percent of M2 consists of spendable currency and checkable deposits and 80 percent is near monies. This indicates that people tend to keep more of their financial wealth stashed away in savings accounts than in their checking accounts (or cash on hand).

  • Third, the bulk (about two-thirds) of M2 near monies consists of savings deposits (and money market deposits at banks). Small denomination time deposits (certificates of deposit) and nonbank money market mutual funds account for the remaining one-third of these near monies.

Near Monies

M2 is the sum of M1 and short-term, small denomination near monies. Near monies are financial assets (primary bank accounts) that can be easily and quickly converted to currency or checkable deposits with little or no loss of value. These assets are almost money, but not completely.

The four primary near money assets added to M1 to calculate M2 are: (1) savings deposits, (2) money market deposits, (3) certificates of deposit, and (4) money market mutual funds.

  • Savings Deposits: These are bank deposits held in standard, interest-paying savings accounts at traditional commercial banks and other depository thrift institutions (credit unions, savings and loan associations, and mutual savings banks). The interest rates paid on savings deposits are generally less than other banks accounts. These deposits are easily and quickly withdrawn as cash or transferred into checking accounts, making them among the most liquid nonmoney deposits available.

  • Money Market Deposits: These are bank deposits in accounts that pay higher interest rates than savings accounts and which have limited check writing capability. While checks written on these accounts work just like standard checks, check writing is usually limited to a few checks per month (say 3 to 5) and/or a minimum amount per check (say $250 per check).

  • Certificates of Deposit: These are bank deposits in accounts that pay higher interest rates than savings accounts but with restrictions on the minimum amount of the deposit and the length of time before the deposit can be withdrawn. Originally the depositor received an actual certificate (a piece of paper) specifying the terms of the deposit, length of time and interest rate paid. Now, like other accounts, this information is stored in an electronic database.

  • Money Market Mutual Funds: These are deposits with nonbank mutual fund companies that are similar to money market bank deposits. They also pay higher interest rates than savings accounts and have limited check writing options. Money market mutual funds used for individual retirement accounts (IRA) or Keough accounts are not included.
All of these near monies are extremely liquid and flow easily between bank checking accounts and currency. The near monies added to M1 to obtain M2 are small denomination and are commonly used by households and consumers for to stockpile saving. Savings deposits, money market deposits, and certificates of deposit are less than $100,000.

A Better Money Measure?

M2 is considered by many policy makers and economists as a better measure of the economy's spendable, liquid assets than M1. The near monies included in M2 can be easily and quickly converted to either currency or checkable deposits. These near monies are not perfectly liquid, like M1, but they are the next best thing.

For example, suppose that Alicia Hyfield's checking account is hovering in the one-digit range, but her near money savings account is substantially bigger. Now suppose that a potential purchase of designer jeans, running at $50, strikes her fancy. Will she pass on this purchase lamenting the minimal balance in her checking account? Or will she pursue it knowing that she has ample funds that can be easily transferred from savings to checking? If she leans toward the second option, then she is operating under the notion that are savings extremely liquid, and that M2 might be a better measure of total money for the economy than M1.

The ease with which near monies can be transferred into M1 motivates a lot of people, especially economists, to argue that M2 is the best measure of the total amount of money in circulation. As such, most government stabilization policies dealing with control of the money supply primarily focus on M2 rather than M1.

The Other Two

M2 is the medium-range monetary aggregate. Two other monetary aggregates tracked by the Federal Reserve System are M1 and M3.
  • Narrow-Range Money: M1: This is the combination of currency (and coins) issued by government and held by the nonbank public and checkable deposits issued by banking institutions. M1 contains the two items that function as THE medium of exchange for the U.S. economy.

  • Board-Range Money: M3: This is M2 plus the addition of several slightly less liquid, investment-type near monies. The near monies added to M2 to obtain M3 include larger denomination certificates of deposit, larger money market deposits, repurchase agreements, and Eurodollars.

<= M1M3 =>


Recommended Citation:

M2, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 22, 2018].


Check Out These Related Terms...

     | monetary aggregates | M1 | M3 | L | savings deposits | money market deposits | money market mutual funds | certificate of deposit | currency | checkable deposits | near monies | plastic money | repurchase agreements | Eurodollars |


Or For A Little Background...

     | money | money functions | money characteristics | fiat money | commodity money | medium of exchange | liquidity | savings |


And For Further Study...

     | money creation | fractional-reserve banking | banking | Federal Reserve System | monetary economics | monetary base | monetary policy | debit card | monetary economics |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury | The Currency Gallery |


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