Which financial instruments are included in M2?

M2 is a measure of the money supply that includes a range of financial instruments beyond just cash. Specifically, M2 encompasses cash and cash equivalents, including all of M1 (which consists of physical currency and demand deposits) plus additional assets that are slightly less liquid.

The inclusion of retail certificates of deposit (CDs) and money market accounts in M2 reflects the nature of these instruments as they can be quickly converted into cash or are easily accessible for transactions. Retail CDs are time deposits with banks that have fixed terms and are commonly held by consumers. Money market accounts typically offer higher interest rates while allowing limited check-writing ability, thus providing both savings and liquidity. This proximity to liquidity is why these instruments form an integral part of M2, contributing to its definition as a broader measure of the money supply.

In contrast, government treasury bonds, corporate bonds, and foreign currencies do not fall under the classification of M2. Treasury and corporate bonds are investment assets rather than transactional ones. Foreign currencies represent a different currency system and do not count toward the U.S. money supply measures like M2.