Money supply: M0, M1, and M2 | The monetary system | Macroeconomics | Khan Academy

What I want to explain in this video is how to measure the amount of money in circulation in the markets, in different ways So we will start from the source, which is the central bank or equivalent federal bodies in some other countries Let's say this bank issues $ 4 Of course, this is a very simple number that we have chosen in order to explain through it how money is transmitted practically or electronically. However, we will focus here on the way money is traded in practice As we agreed in the beginning we will start with the four dollars printed in the central bank Then the bank buys securities in the open market, which are usually risk-free and highly liquid securities Liquidity means that these securities can be bought and sold easily and in large quantities. For example, Treasury bonds are financial guarantees or liquid assets Of course, the popular Pez Dispensers is not an organization with liquid assets If I buy Pez Dispensers for a billion dollars It will be very difficult for me to resell and difficult for me to get that amount to buy them On the other hand, I will not be able to offer them all for sale again.

In a close period of time So suppose the central bank decides to purchase a $ 4 financial guarantee Let's imagine it here And the owner of this guarantee decides to deposit the amount in the bank Of course he can deposit the amount directly in the bank or he can simply spend the money To buy other things Then that third party from whom the items were purchased deposits the cash in the bank As we can see together, all the money is deposited in one form or another in the bank Let me put here a private bank, and let's call it "the first bank." Now all the dollars that were dealt were deposited in the "Alawwal Bank", so the money is no longer in the Central Bank.

That is, the central bank does not own it They have all been transferred to the first bank (I will explain all the steps in the drawing to facilitate the link between them) Let's go, when you deposit the cash in the private bank, I will have to keep $ 3 ready for the order I have to write checks against it Checks will be accounted for $ 3, so that their owners can write them with a value not exceeding $ 3 As for the remaining value ($ 1), it can be kept in the savings account And get the benefits from it, rather than keeping it backed up So we have $ 1 in a savings account They cannot write checks from him Of course there are certain cases in which checks can be drawn up, but in order to keep things clear, let's assume that they cannot write checks.

In the remaining cases, checks can be drawn up with certain restrictions …. To get back to the savings account, I have $ 1 to dispose of Without having to reserve, so I can lend this dollar Suppose I loaned it, and suppose also that the person who borrowed it deposits it in another bank directly So let's call it the "second bank" and it's a private bank We also note that the money moved from the first bank to the second bank, and this is a drawing that clarifies the matters And here the money is deposited in the second bank Let's also assume The second bank put this money on demand, and it needs some reserves (This is called a fractional reserve system) And I can borrow from her (in the United States a bank can lend up to 90% of its reserve value) Let us consider that this bank is rather moderate and will not lend more than two-thirds of its reserves So the bank will lend $ 2 out of $ 3.

Then suppose that the person who borrowed deposited his money in the second bank by chance. So this $ 2 will be in the second bank, after I left the first bank Although a person at Alawwal Bank can still write checks up to $ 3. Going back to the second bank, let us assume that the money is placed in the checking account to write checks Accordingly, the second bank can do several things: In a check account, some reserve should be kept Let us assume that the bank’s policy is moderate, that is, it will allow lending of up to 50%. (Although it can lend up to 90%) And you lend out the money Then someone borrows it and puts it in his hands.

They can also loan out entire savings, and let's just say That the person they loaned out this $ 1 in savings to put into their wallet Note, the original $ 4 is still there Now, to be clear, this person's private bank (first bank # 1) here can write you up to $ 3. And the private bank (second bank # 2) for this person there can write a check of up to $ 2 [let me do this in the same color] Now, let's think about the forms of money there and here We might think about money in a very, very narrow way, which is, "The central bank prints what?" Or it is produced electronically (as electronic savings for bank customers' accounts) For the sake of simplicity here, you can think of the tangible currency that you are printing – that is the base money This is often referred to as base money And in the United States (and other countries), it is often the same M0 There is little difference from one country to another Here's an example, as soon as they print it out and put it into circulation (And it was $ 4) We have $ 4 basic Kamal This is evident because once it is printed it brings the warranty (warranty) with it And when traded, this $ 4 can be used to buy things It can be used to facilitate transactions Now, it seems clear that not everything can be used as money in this small world that we have made You have this $ 4, but private banks can write checks here So we're going to have a bit of a side definition of money And here we'll call it M1 Here, there are two methods you can think of We can consider it to be all the currencies in people's pockets In addition to all the capabilities (efficiency) of writing checks, then if we can review it in this way That $ 2 plus the $ 5 check writing efficiency here Then you can get $ 2 of physical currency in people's wallets (not in banks).

Add to that the $ 5 check writing fee, which will give you $ 7 On the other hand you can see, it is M0 Check Deposit [I will only write checks here] But if you did, you are now adding the count. Because some M0 are reserves in check filings Or, I could say that some check deposits are kept as reserves for M0 Then you will have to subtract the reserves Then you will get $ 4 Because we don't want to double the calculation of this model here .. you will get M0 is $ 4 I'll do it in white M0 is $ 4 Check deposits are $ 5 Let me do it pink Plus the $ 5 Then you will want to subtract reserves The reserves here, there are $ 2 in reserves, so minus $ 2 And you'll return to $ 7 The point of all this is not to double the calculation for anything You do not double count this here as part of Check Deposits and part of M0 You don't use it twice It is basic money and check deposits, so we don't want to count it twice The easiest way to think about it is: "What can be used in this marginal definition to facilitate transactions?" This is $ 2 in people's wallets and this ability to write up to $ 5 in checks So this opinion here And if we want to get more marginal, we can have something called M2 Here we can say, which can be used directly to facilitate transactions now So it will be the $ 7 of M1, plus the things that can be converted into M1 For example, these savings accounts can be easily transferred to check accounts It may take only a few days (there may be restrictions) but it can be transferred And when it is transferred, the bank’s saving requirements will change slightly, but will be allowed If this person makes a transfer, they will be able to write more checks So M2 has M1 plus the things that are easy to convert into M1 So they will contain savings accounts, market money accounts (I won't go into details here But it's kind of the same that you get a little interest on it, but there are limitations You can access it, but it is not difficult to switch to a check account) But things like small dollar-value time-deposit accounts.

But for simplicity's sake in this example, it would be a savings account So it's $ 7 from M1, plus $ 2 from the savings account here So this is just to give a visualization When someone talks about financial dependence, you actually have to say, "What are you talking about?" The most ideal is that you are talking about the M1 Because this is something that can be used directly to facilitate transactions Things like the ability to write dollar checks in someone's wallet But maybe they were talking about basic money (M0, tight money is the same, especially in the US) Or it may denote something more after (marginal) And there are marginal definitions even of M2, although M3 have stopped reporting it But the M3 does have things that are little more than real money It is a check account, but it is actually quite mobile (fluid) So they will contain other kinds of savings However, the Federal Reserve has stopped issuing it in the recent past So these are the ones that are usually referred to

test attribution text

Add Comment