What Is Broad Money?
Let me explain what broad money is—it's a category we use to measure the amount of money circulating in an economy. You should know it's defined as the most inclusive method for calculating a country's money supply, including narrow money plus other assets that you can easily convert into cash for buying goods and services.
Key Takeaways
- Broad money is the most flexible method for measuring an economy's money supply, accounting for cash and other assets easily converted into currency.
- The formula for calculating money supply varies from country to country, so the term broad money is always defined to avoid misinterpretation.
- Central banks tend to keep tabs on broad money growth to help forecast inflation.
Understanding Broad Money
Because cash can be exchanged for many kinds of financial instruments, it's not simple for economists to define how much money is circulating in the economy. We measure money supply in different ways, using a capital letter 'M' followed by a number to refer to the specific measurement.
The formula for calculating the money supply varies from country to country. Broad money is the broadest measure, encompassing narrow money such as cash and checkable deposits, along with less liquid assets like certificates of deposit, foreign currencies, money market accounts, marketable securities, Treasury bills, and anything else that can be easily converted into cash—but not including company shares.
Example of Broad Money
In the United States, the most common measures of money supply are the monetary base, M1, and M2. Back in March 2006, the Federal Reserve stopped publishing M3 statistics.
These measurements vary according to the liquidity of the accounts included. The monetary base, or M0, typically includes only the most liquid instruments, such as coins and notes in circulation. At the other end of the scale is M2, which is categorized as the broadest measurement of money.
Different countries define their measurements of money in slightly different ways. In academic settings, we use the term broad money to avoid misinterpretation. In most cases, broad money means the same as M2, while M0 and M1 usually refer to narrow money.
Fast Fact
Here's a quick fact for you: The Federal Reserve tracks the M1 and M2 money supply. M1 is defined as currency in the hands of the public, traveler's checks, demand deposits, and checking deposits. M2 includes M1 plus savings accounts, money market mutual funds, and time deposits under $100,000.
Benefits of Broad Money
Widening the scope of the total money in circulation comes with several advantages. Above all, it helps policymakers like those in central banks to better grasp potential inflationary trends. They often look at broad money, alongside narrow money, to set monetary policy.
Economists have found close links between money supply, inflation, and interest rates. Central banks such as the Federal Reserve use lower interest rates to increase the money supply when the goal is to stimulate the economy. Conversely, in an inflationary setting, interest rates are raised and the money supply diminishes, leading to lower prices.
In simple terms, if there is more money available, the economy tends to accelerate because businesses have easy access to financing. If there is less money in the system, the economy slows and prices may drop or stall. In this context, broad money is one of the measures that central bankers use to determine what interventions, if any, they could introduce to influence the economy.
Is Broad Money the Same as M2?
Generally, broad money refers to M2 and M3 money. Narrow money is the most liquid money in an economy, such as cash and demand deposits, whereas broad money is a wider inclusion of money, including that which is not as liquid, such as long-term deposits and savings deposits.
What Is the Difference Between M1, M2, and M3 Money?
M1 money is the most liquid money in an economy that includes cash and demand deposits. M2 money is M1 money plus savings deposits, money market deposits, and time deposits less than $100,000. M3 money is M2 money plus long-term time deposits.
How Much M1 and M2 Money Is There?
In the U.S., as of July 2024, the M1 money stock is $18.05 trillion and the M2 money stock is $21.05 trillion.
The Bottom Line
Broad money is a comprehensive measure of an economy's money supply, including both cash and easily convertible assets. It helps central banks assess economic conditions and adjust monetary policy to manage inflation and growth. By tracking broad money, policymakers can make informed decisions on interest rates and other interventions to influence the economy.
Other articles for you
Gemology is the scientific study of identifying, cutting, and valuing gemstones, involving professionals like gemologists, jewelers, and scientists, with insights on careers, investments, and training paths.
Weather insurance provides financial protection against losses from measurable adverse weather, while weather derivatives hedge against common weather-related risks.
Noninterest expenses are the fixed operating costs of banks, separate from interest payments, that include items like salaries and rent, and must be managed to maximize profits.
The lower of cost or market method values inventory at the lesser of its original cost or current market value to record potential losses accurately.
The bundle of rights is the set of legal privileges granted to real estate owners upon title transfer.
The Norwegian Krone (NOK) is Norway's official currency, managed by Norges Bank, with a detailed history, denominations, and economic influences.
Risk-adjusted return evaluates an investment's profitability by accounting for the risk involved compared to a risk-free benchmark.
A voting trust agreement allows shareholders to transfer their voting rights to a trustee for temporary corporate control.
Lean Six Sigma is a strategy that combines Lean and Six Sigma to eliminate waste and defects for better business performance.
Strategic alliances allow companies to collaborate on shared goals while remaining independent, offering benefits like market expansion and risk sharing.