Money Supply (M2)

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1. The M2 measure of the money supply is considered to be a leading economic indicator. Briefly explain why. Use the diagram relating M2 to real GDP and list the years in which increases in the growth rate of M2 preceded an increase in the growth rate for real GDP, or decreases in M2 growth preceded a decrease in real GDP growth. Compare your findings to the years in which the growth rate for real GDP responded by moving in a direction opposite that of M2. Use this information to briefly discuss the usefulness of M2 as a leading economic indicator.

2. Briefly describe how the M1 measure of the money supply is different from the M2 measure. Visit Economagic at http://www.economagic.com/fedstl.htm and plot "% from last year" for M2, SA, and M1, SA, for each of the last 12 months. Do M1 and M2 move in the same direction and in the same magnitude?

3. Visit the Conference Board (http://www.tcb-indicators.org/lei/leilatest.htm) and briefly describe how the Conference Board incorporates money supply data into the Index of Leading Economic Indicators.

 

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