Is M2 a monetary base?

The monetary system is complex and comprises various measures of money supply. Among these, M0, also known as the monetary base, stands out as the smallest and most liquid measure. It encompasses currency in circulation and the reserve balances held by commercial banks at Federal Reserve Banks.

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M0 serves as the foundation upon which the broader money supply is built. It represents the amount of money that is readily available for use in transactions, excluding any form of lending or investment.

Moving up the ladder, M1 takes into account not just currency in circulation but also demand deposits held at commercial banks and other liquid deposits. This broader measure provides a more comprehensive view of the money available for immediate spending.

M1 is often considered a crucial indicator of economic activity, as it reflects the amount of money that consumers and businesses have at their disposal for daily transactions. It plays a pivotal role in shaping inflation rates and interest rates.