Question

Elaborate on the components of M2 in the Malaysian context.

Answer 1

Cash in your pocket is called money, right? Then what about those deposits(savings, fixed), credit cards, assets, equities, funds. etc. What are those then, are they money too? Lets find out.

So, money and its supply in an economy is measured under three parameters namely, M1, M2 and M3 based upon their liquidity.

"Liquidity refers to how quickly a financial asset can be used to buy a good or a service." For instance, $50 in your pocket can be used anytime to buy a commodity(such as a soft drink, a sandwich and others). But if that same $50 would be in your bank account then you woul d have to go to an ATM or your bank to withdraw that amount and then only you could use it.

Nows, lets discuss what those different money supply parameters comprise of:-

M1 money supply includes coins and currency in circulation in an economy at a given point of time. These are called the amount held in deposits and checking account which a client could get from the bank at any time on demand, by issuing check or by using a debit card. This whole together sums up the definition of M1.

M2 is a broader concept, it includes the whole M1 and few other types of deposits. For example, M2 includes saving deposits in a bank in which you cannot write a check directly but could withdraw money at an ATM. Another component of M2 is the certificates of deposits or time deposits, which the account holders has commited to leave in the bank for a certain time period, which ranges from a month to few years earning them a higher interest rate. So, M2 is basically all that money which you could use but you require little more efforts to withdraw than that would have been used in M1.

Similarly, M3 money supply includes M2 as well as instituitonal money market funds, larger liquid assets and large time deposits. M3 is less liquid when compared to M1 and M2.

The central banks of every country is responsible for tracking the amounts of M1, M2 and M3. So in Malaysia, Bank Negara Malaysia which is the central bank of Malaysia is reponsible and keeps the track of money suppply in the economy.

Malaysia’s money supply M2 was reported at $484.45 billion in August 2020. Which previously was at $474.97 billion in July 2020. Malaysia’s M2 money supply data is updated monthly, averaging $66.87 billion from December 1969 to August 2020. This data reached an all-time high at $484.45 billion in August 2020 and a recorded its lowest in December 1969 which was of $1.21 billion. Malaysia’s M2 money supply data is reported by CEIC Data. Bank Negara Malaysia provides M2 money supply in local currency.