Measures of Money II

M2 is one way to measure an economy's money supply. It is used in many countries, including Canada and the United States. What M2 includes may vary across countries. Consider the U.S., where the Fed measures the money supply and categorizes it according to the liquidity of each type of money. M1 includes the most liquid assets that can be spent immediately.

There are other categories of money that are less liquid because they take more time to access and become liquid. These types of money are added to M1 to form the category of the money supply known as M2. M2 includes M1 and adds small-denomination time deposits and retail money market mutual fund shares.

Time deposits are a type of savings instrument. The money is payable to the depositor on a specified date called the maturity date. Early withdrawals incur a penalty. Small-denomination time deposits are those issued in amounts of less than $100,000.

Retail money market mutual fund shares, or retail MMFs, are available to individual investors through investment companies like Vanguard. They are redeemable on demand, meaning investors can sell their shares back to the investment company.