In terms of economic indicators, what is the purpose of M2?

M2 serves as a significant economic indicator that offers insights into the money supply, which is crucial for understanding inflation and economic growth. M2 includes all the components of M1 (which consists of cash and checking deposits), as well as savings accounts, time deposits under $100,000, and other near-money assets. By encompassing a broader range of liquid cash forms, M2 highlights the amount of money that is readily available for spending and investment in the economy.

Consequently, monitoring M2 can help predict consumer spending patterns, investment activities, and overall economic health. When M2 grows too quickly, it can signal potential inflation, as increased money supply leads to more spending power among consumers. Conversely, a shrinking M2 might signal a slowdown in economic activity. This understanding of the relationship between M2 and economic indicators forms the basis of monetary policy decisions made by central banks, aiming to strike a balance between growth and inflation.