There are a quite only a few methods, the standard methods which are employed by Fed in order to measure the money supply in the Economy. Money supply is the flow of money in the economy at a particular point of time. Money supply measurement is done on the basis of the activities that are taking place in the economy. Money supply is not just the currency or money in circulation but it is more than that. After reading how economists looks at various forms of money you will get an idea of how money supply might be measured.
Money supply can be defined in the following ways-
1. M1 : This is the definition of money which a layman thinks of. Yes, the currency in circulation in the economy. So it will include all the notes, coins, may be traveller's cheques etc.
2. M2 : M2 is a broader term than M1. M2 includes M1 plus the liquid money as savings which can be converted to cash in no time. M2 = M1 + Small savings accounts, Short term deposits and money market investments.
3. M3 : M3 is above all broader, it includes M2 and Long term deposits also, Large Money Market investments(long term), repurchase agreements normally used by large corporates. From 2006 onwards, Fed uses only M1 and M2 to measure the money supply in the economy.