What is the difference between M1 and M2 money velocity?
The shared portion of M1 and M2 will have the same velocity: this is the same thing as saying the velocity of M1 is the same as the velocity of M1. However, the portion unique to M2 will have a lower velocity: for example, saving deposits are usually moved around less than credit in demand deposits (checking accounts).
MONEY VELOCITY (MV = PQ)
M1 money understandably has a higher velocity ratio than “stickier” M2 money: a one-dollar bill in your pocket, for example, is much more likely to be “turned over” in a transaction compared a single dollar held in your savings account.
M1 and M2 money are the two mostly commonly used definitions of money. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks + saving deposits. M2 = M1 + money market funds + certificates of deposit + other time deposits.
M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs. M1 is an estimate of cash, checking, and savings account deposits only.
Velocity is a ratio of nominal GDP to a measure of the money supply (M1 or M2). It can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP.
From Wikipedia, the velocity of money is "measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." There is indeed more M2 than M1 but the velocity of M1 is often higher than that of M2.
Velocity of M2 Money Supply. Since 2007, the velocity of money has fallen dramatically as the Federal Reserve greatly expanded its balance sheet in an effort to combat the global financial crisis and deflationary pressures.
M1 is all the money held by the public in currency and at the bank. M2 includes all of M1 plus all the other assets that can be easily converted into cash. When you see a chart like this, it's easy to understand why inflation has been high in the past few years.
M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.
M1 includes currency, traveler's checks, and money in checkable accounts, whereas M2 includes M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.
How can you tell the difference between M1 and M2?
One of the main differences between the M1 and the M2 chip is the number of GPU cores. The M1 chip has 8 cores, while the M2 chip has 10 cores, allowing the M2 chip to provide up to 25% higher graphics performance than the M1 while at the same power level.
M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.
From the 'About this Mac' screen, on the 'Overview' tab, look for a line that indicates either 'Chip' or 'Processor'. If the line contains M1 or M2, the machine is running Apple Silicon.
“Recent inflation behavior has been consistent with a lagged effect of M2 on personal consumption expenditures (PCE) inflation,” Neely wrote. For instance, he cited the rise of PCE inflation beginning in February 2021, which coincided with the peak M2 growth rate of 26.9% and was a year after M2 growth began to soar.
Velocity of M1 Money Stock in the US is at a current level of 1.547, up from 1.509 last quarter and up from 1.323 one year ago. This is a change of 2.52% from last quarter and 16.93% from one year ago.
Calculated as the ratio of quarterly nominal GDP (GDP) to the quarterly average of M1 money stock (M1SL) The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period.
As velocity of money is inversely related to the time interval or is directly related to the frequency of exchange, as interest rates rise, the velocity of money increases.
Explanation
M1 is the most the liquid asset and M2 is the larger measure of money supply because it comprises highly liquid assets that aren't cash.
When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.
The concept relates the size of economic activity to a given money supply, and the speed of money exchange is one of the variables that determine inflation.
How can I increase my money velocity?
Hence, a lower demand for money increases money velocity in 2 ways: an increase in spending and/or an increase in investments.
| Last Value | 1.347 |
|---|---|
| Latest Period | Dec 2023 |
| Last Updated | Mar 4 2024, 12:32 EST |
| Average Growth Rate | -0.36% |
Economists make a distinction between M1 and M2 because the elements of M1 include liquid assets only, while M2 includes M1 plus various kinds of near money, like savings accounts and money market mutual funds.
A credit card is not a part of the M1 or M2 money supply, and as a matter of fact, is not part of the money supply at all. This is because money supply is the aggregate value of monetary assets, and does not include liabilities. Credit card balance represents a liability, not an asset.
But the increase in CDs (saving deposits) and other money market funds will M2, but does not affect M1. Hence, these changes can explain the rapid increase in M2 relative to M1.
