The M1 money supply is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits. It is the most commonly used measure of the money supply by economists and central banks. The M1 money supply is calculated by adding up the values of currency in circulation, demand deposits, and other checkable deposits.
Components of M1
The components of M1 are as follows:
* **Currency in circulation:** This includes coins and paper money that are in circulation outside of the Federal Reserve Banks and the vaults of depository institutions.
* **Demand deposits:** Demand deposits are funds held in checking accounts that can be withdrawn on demand by the account holder. This includes both individual and business checking accounts.
* **Other checkable deposits:** Other checkable deposits, also known as OCDs, include NOW accounts at depository institutions and credit union share draft accounts.
Calculating M1
To calculate the M1 money supply, add up the values of currency in circulation, demand deposits, and other checkable deposits. The formula for calculating M1 is as follows:
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M1 = Currency in circulation + Demand deposits + Other checkable deposits
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Variations in M1 Calculation
The calculation of M1 may vary slightly depending on the country and its specific definitions. For example, in the eurozone, M1 also includes overnight deposits, while in Australia, it includes current deposits from the private non-bank sector.
Conclusion
The M1 money supply is an important measure of the money supply that is used by economists and central banks to track economic activity and inflation. It is a narrow measure of the money supply that includes only the most liquid components of the money supply.
References
* Measuring Money: Currency, M1, and M2 | Macroeconomics (https://courses.lumenlearning.com/wm-macroeconomics/chapter/measuring-money-currency-m1-and-m2/)
* M1 Money Supply: How It Works and How to Calculate It (https://www.investopedia.com/terms/m/m1.asp)
* Measuring Money: Currency, M1, and M2 – Principles of Economics: Scarcity and Social Provisioning (2nd Ed.) (https://openoregon.pressbooks.pub/socialprovisioning2/chapter/measuring-money-currency-m1-and-m2/)
FAQs
What is M1 money supply?
M1 money supply is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits.
What are the components of M1 money supply?
The components of M1 money supply are currency in circulation, demand deposits, and other checkable deposits.
How do you calculate M1 money supply?
To calculate M1 money supply, add up the values of currency in circulation, demand deposits, and other checkable deposits.
Why is M1 money supply important?
M1 money supply is an important measure of the money supply that is used by economists and central banks to track economic activity and inflation.
What is the difference between M1 and M2 money supply?
M1 money supply is a narrower measure of the money supply than M2 money supply. M1 includes only the most liquid components of the money supply, while M2 includes M1 plus less liquid components such as savings deposits and money market funds.
How does the central bank control the M1 money supply?
The central bank can control the M1 money supply through various monetary policy tools, such as open market operations, changes in reserve requirements, and changes in the discount rate.
What are the implications of a high M1 money supply?
A high M1 money supply can lead to inflation, as there is more money chasing the same amount of goods and services.
What are the implications of a low M1 money supply?
A low M1 money supply can lead to deflation, as there is less money chasing the same amount of goods and services.