M1 is a measure of the total amount of money in circulation, consisting of paper money, coins, public checking accounts, traveler’s checks, automatic transfer service accounts, and credit union accounts. The US Federal Reserve manipulates the M1 money supply to control inflation, often by decreasing the money supply or raising interest rates, but these actions can also reduce consumer spending and hamper business activity.
An economy’s money supply is often divided into four parts: M0, M1, M2, and M3. The money supply M1 is a measure of the total amount of money in circulation. It consists of M0, which is paper money and coins, plus public checking accounts. Other forms of M1 currency are: traveler’s checks, automatic transfer service accounts, and credit union accounts. Economists often use the M1 measure of money supply as a proxy for inflation.
In the United States, M1 is money issued to commercial banks by the United States Federal Reserve for deposits and loans. The total amount of money in circulation often affects the flow of economic activity. Economists generally use M1 along with the M2 and M3 measures of money supply to measure how much money is in circulation. M2 consists of M1 plus savings accounts. The M3 money supply consists of M2 plus large commercial deposits.
The US Federal Reserve often manipulates the M1 money supply to control inflation. If the Federal Reserve issues or prints too much money, the result is inflation and rising prices. An increase in the price of goods and services often reduces spending for consumers and a loss of income for business owners.
A common solution often used to combat inflation is to decrease the money supply. In effect, the Federal Reserve stops printing money. The goal of reducing the money supply, in general, is to reduce inflation and prices.
Reducing the money supply, many economists argue, could hurt the broader economy without reducing inflation. Often, reducing the M1 money supply not only reduces inflation and prices, but often reduces the purchasing power of consumers. With less money to spend, many consumers will generally only buy the goods and services they need.
Along with manipulating the money supply, the Federal Reserve often raises interest rates to control inflation. Typically, the US Federal Reserve only adjusts interest rates when it believes that prices are rising enough to cause inflation. An interest rate increase is generally intended to reduce the amount of money in circulation. This interest rate increase is generally 1 percent or less, depending on economic conditions. If the Federal Reserve raises interest rates too sharply, it may result in reduced lending by consumers and businesses.
Like reducing the M1 money supply, raising interest rates can reduce consumer spending and hamper business activity. When interest rates rise, many consumers and business owners often won’t buy the products they want because it costs too much to borrow money.
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