The data provided by the Fed tells of a steady upward movement of the M1, M2 and M3 values for the period of the last three years. (2008, 2009 and 2010). This is true both for the seasonal adjusted values as well as the values that are not seasonally adjusted. The Fed has continually used these money aggregates to put the rate as well as the effects of inflation in place. This has enabled the GDP of the country to have a predictable growth trend over the years even in the light of factors like inflation.
The Growth Rate Trends
To get the rate of growth, we will use the data provided by the Federal Reserve (2010).The first step is to compute the index using a set of data. Taking 2008 values of October, November and December,
We Will Have
Index one (M1) = 1602.1/1516.9=1.0561
Index two (M1) = 1516.9/1471.1= 1.0311
The rate of change in M1 in 2008 is given by:
(1.0561-1.0311)/1.0561 *100= 2.37%
For M2, We Will Have
Index 1(M2) = 8255.3/8062.5=1.0239
Index 2 (M2) =8062.5/8009.5=1.0066
The rate of change in M2 for 2008 is given by,
(1.0239-1.0066)/1.0239*100= 1.69%
As can be seen from the computations above, there is a close correlation between the M1 and M2 values as an increase in one was proportional to an increase in the other while a decrease in one was also proportional to a decrease in the other. However, the M1 and M2 will yield some differences in some scenarios. A case in point is the period of 1968-1971 where the rate of growth of M1 M2 did not show any sign of acceleration. However, taking the M2 and M3 values of the same period results into a significant rate of growth noted. These kinds of discrepancies are undesirable and experts have suggested the use of weighted averages to avoid this. Weighted average will factor in all the three money aggregate values in the determination of the money supply curve.
Measurement issues in M1 and M2
Usually money aggregates are represented by the terms M1, M2 and M3. The three are important in the measure of money that is available in circulation for any given time. The government regulates money supply in a bid to check on inflation. Usually, if there is too much money in circulation, there is the effect of more money available for limited goods. The result is usually sky rocketing prices. The M1 is usually the measure of the money reserves. Simply put, it is a measure the dollars in circulation. On the other hand, the M2 is a measure of liquid money (Federal Reserve (2010). This includes the money markets, diverse investments as well as saving accounts.
There are a couple of issues that could affect the growth rate of M1. The first issue is the hoarding of dollars. This would mean that there is less money in the market thereby forcing the M1 values to drop. Additionally, there is the issue of stashing money in saving accounts in the banks without spending it. The opposite of this case is true as addition of money into the economy will cause a rise in the M1.this will also impact the money flow in the economy.
The rate of growth of M2 can be influenced by a variety of factors. Firstly, there is the issue of people not putting money in the M2 related outlets like the money markets and the savings accounts. For instance, since stocks are largely said to be liquid money, a liquefaction of one’s investments instead of reinvestment of the same will result in a significant shift in the M2 level. Similarly, if a majority of the investors decided to take more of their money in the stocks and put it into bonds, the M2 would decrease. The reason behind this is the fact that stocks are more readily computed in M2 while the bonds may not necessarily be computed in M2.
Reference
Federal Reserve (2010). Money Stock Markets. Web.