Broad Money

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Definition of 'Broad Money'

Broad money, also known as M2, is a measure of the money supply that includes cash, checking deposits, savings deposits, and money market funds. It is a broader measure of money than M1, which only includes cash and checking deposits.

Broad money is used to measure the amount of money available in the economy and is an important indicator of economic activity. When broad money increases, it is often seen as a sign that the economy is growing. However, a large increase in broad money can also be a sign of inflation.

There are a number of factors that can affect the level of broad money. These include interest rates, government spending, and economic growth. When interest rates are low, people are more likely to save money. This can lead to an increase in broad money. Government spending can also increase broad money, as the government creates new money when it spends. Economic growth can also lead to an increase in broad money, as businesses and individuals earn more money and spend it.

The Federal Reserve uses a number of tools to manage the level of broad money. These tools include open market operations, which are the buying and selling of government securities, and changes to the reserve requirement, which is the amount of money that banks must hold in reserve. The Federal Reserve uses these tools to try to keep the level of broad money in line with its goals for economic growth and inflation.

Broad money is an important indicator of economic activity and is used by the Federal Reserve to manage the economy.

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