Sample Solution

  The U.S. money supply is the total amount of money in circulation within the United States economy at any given time and it consists of different components, or measurements, that help to define its size. These components are known as M1, M2 and M3 and they measure different types of assets held by entities such as individuals, businesses and financial institutions.

M1 measures the most liquid forms of money in circulation including currency (coins and bills) held by consumers or businesses, traveler’s checks, demand deposits (for example checking accounts) at banks and other financial institutions as well as other checkable deposits which includes anything from paychecks to government payments processed electronically. This component is normally seen as a good indicator for economic activity since it reflects transactions more than savings activities indicating short-term purchasing power. M2 consists of all the elements present in M1 plus non-institutional money market funds, savings accounts at banks and thrift institutions such as credit unions, retail money market mutual funds shares among others which provide a higher degree of liquidity than traditional bank accounts but not quite up to par with those found in M1. Lastly we have M3 which combines all elements included in both M1 & M2 along with larger instruments such as repurchase agreements issued by depository institutions which are generally used by large institutional investors such corporations or governmental entities; Eurodollars held abroad (mostly owned be foreign countries); term repos; overnight repos; certain kinds of savings bonds; certificates of deposits issued by commercial banks for periods over two years…etc providing an even broader perspective on where money is being circulated within the U.S economy today . In order to maintain control over these various components the United States government relies heavily on Federal Reserve System also commonly known simply “The Fed” founded back on 1913 after several banking related crises occurred throughout American history.. The main goal behind this system was primarily to establish stability amongst financial markets while promoting national goals promoting employment rates , keeping prices stable while monitoring available credit conditions with aims towards creating long term sustainable growth .. Over time these goals were extended further shaping their current mission into four key areas: supervising/regulating banking industry ; maintaining nation’s payment system ,controlling monetary supply & setting interest rate policy aiming to influence overall credit conditions through each one them... Nowadays three primary tools used by the Federal Reserve are open market operations consisting mainly buying/selling securities from member banks ; reserve requirement enforcing particular fractional reserve requirements upon members during seasonal peaks /depressions; Discount window lending allowing member banks access emergency loans if needed under certain restrictions ... Actively intervening whenever necessary allows The Fed a great deal flexibility responding rapidly changing economic environment whilst preserving public confidence .... 2007 crisis saw how global economies are affected simultaneously due partly deregulation created within complex networked systems grown during late 90s . Collateralized debt obligations made up mostly subprime mortgages were packaged together combining risky investments alongside safe ones reducing premiums paid credit rating agencies resulting mispriced products misleadingly rated too high .. Financial companies holding large portions CDOs ended trapped situation when markets collapsed with no way out eventually plunging US into recession .. Current monetary policy seeks using mentioned tools achieve multiple objectives containing inflationary pressures while relying strong labor productivity sustain high living standards ensuring full employment without sacrificing price stability based Phillips curve relationship between unemployment& inflation ...Additionally interest rate policies have been particularly useful counteracting business cycle effects quickly boosting investment levels whenever needed without involving drastic changes fiscal side ... However many argue effectiveness monetary policy limited specially longer governments unable respond fast enough sudden developments thus leaving private sector vulnerable potential shocks hence importance ensuring robustness banking sector strengthen defenses safeguarding future crises similar nature