Final answer:
The money supply in the United States is backed by the Federal Reserve's ability to maintain the stability of the currency. The Fed regulates the amount of money in circulation, ensuring enough liquidity to meet the economy's demands, and defines money as M1 and M2, which indicates varying levels of liquidity.
Step-by-step explanation:
The money supply in the United States is essentially "backed" by the Federal Reserve System's (the Fed) ability to keep the value of money relatively stable. The Fed operates as the central bank of the United States and manages monetary policy to promote a stable economy. This involves adjusting the money supply to meet the demands of the public and the economy as a whole.
During periods of increased economic activity, such as the Christmas shopping season, the Fed increases the amount of currency available in banks, which is then reduced again when demand falls. Moreover, the Fed ensures the stability of the money supply using tools such as reserve requirements and open market operations to influence liquidity.
There are two definitions of money supply, M1 and M2. M1 includes very liquid forms of money such as cash, checkable (demand) deposits, and traveler's checks, whereas M2 includes M1 plus less liquid forms like savings and time deposits, certificates of deposits, and money market funds.