Money Supply

Chart of the Week for February 16-22, 2007

The M2 money supply displayed in the graph above is a broad measure of the amount of money in circulation in the economy. It is made up of the more narrow M1 measure (cash, regular demand deposits, and other check-like deposits) as well as most savings, money market, and certificate of deposit accounts. The Consumer Price Index (CPI) measures the average change in prices for a fixed basket of goods over time and is used as a primary gauge of inflation in the economy. Historically, inflation and money supply have been generally linked. As shown by the arrows in the graph above, changes in money supply are usually followed by changes in inflation.

The Federal Reserve Board attempts to use money supply as a tool to influence inflation in the economy. If the Fed determines that the level of economic growth may spur inflation, they may tighten money supply by raising interest rates. In a state of economic contraction, in which prices may actually decrease (commonly known as deflation), the Fed may expand money supply in an effort to reinflate the economy.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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