Question

How useful is M2 in tracking inflation? Explain.

Answer 1

M2 is defined as the measurement of money supply in the economy; it is a very important factor in forecasting inflation in a given state or country. The level of interest rates and inflation has a direct impact on the general economy; they significantly impact the level of employment, business spending, trade balances, employment, currency strength, and consumer spending.

M2 and inflation

When the amount or quantity of money increases in the Economy at a rapid speed, it results in high levels of inflation. This has been evident in those economies where there has been an increase in money supply in the economy like Turkey and Ukraine, wherein the late 1990s, the rate of inflation ranged from 30% to 70%, and the money supply increased at a comparable rate. A high supply of money in the economy, therefore, translates to high levels of inflation, and if you want to control inflation in a certain economy, then it will call for controlling the quantity of money supply in the economy.