. Outline the various components of the U.S. money supply as it exists today

Expert Solution

Money Supply means the total of monetary assets available in the economy. It includes mostly the currency in circulation and demand deposits. It measures the liquidity in the economy.

The various components of the US money supply are as follows:

M0: It includes the total of all the physical currencies that is Federal Reserve Notes, US notes and coins. It is also known as high-powered money and act as a base for the economy.

MB: Monetary Base is a total of physical currencies in circulation plus Bank deposits held with the Federal Reserve.

M1: It includes the highly liquid assets that can be easily convertible into cash. It involves the total of M0 plus demand deposits, traveler checks and other checkable deposits.

M2: M2 includes the total of M1 plus "near money". Near money includes saving deposits, money market securities, mutual funds and other time deposits.

MZM: "Money Zero Maturity" includes the total of M2 supply less time deposits plus money market funds. Time deposit is not included in MZM as it is not redeemable at par.

M3: M3 includes M2 plus large time deposits, institutional money market mutual funds, repurchase agreements and deposits of eurodollars. M3 are less liquid in nature.

M4: It includes M3 plus commercial papers and T-bills.

L: L includes M4 plus Banker's Acceptance. It represents the measurement of total Liquidity.

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