How is the money supply indicator calculated?

• A. Starting from 100 and adjusting by stock price
• B. Starting from 100 and adjusting by the employment rate
• C. Starting from 100 and adjusting by percent changes in M2 and CPI
• D. Starting from 100 and adjusting by interest rate changes

Answer: (C)

The money supply indicator is calculated by analyzing changes in the money supply, particularly focusing on M2, which includes cash, checking deposits, and easily convertible near money. The Consumer Price Index (CPI) is incorporated to account for inflation when evaluating the purchasing power of money over time. This approach provides a more comprehensive view of how the money supply influences the economy and consumer behavior by considering both the volume of money available and its real value.

By starting from a base index of 100 and adjusting it according to the percentage changes in M2 and the CPI, this method allows traders and economists to gauge shifts in liquidity and inflationary pressures, making it a valuable tool for understanding economic conditions. This context illustrates the relationship between money supply changes and price levels, enabling better predictions and trading decisions based on economic indicators.