Question

Describe M1, M2, and M3. Which is considered as the Money Supply?

Answer 1

Money supply is all the money and other liquid resources on the date calculated in the economy of a country. Cash and deposits that can be used almost as easily as cash are roughly included in the money supply. Governments use some combination of their central banks and treasuries to issue paper currency and coin. Bank regulators control the money supply available to the public through banks' criteria for keeping deposits, how credit can be expanded, and other regulation.

For example, M0 and M1, are also called narrow money and include circulating coins and notes, and other money equivalents that can easily be converted to cash. M2 contains M1 and, on top of that, short-term bank deposits and some money market funds. In addition to the long-term deposits, M3 contains M2. Yet M3 is no longer included in the Federal Reserve 's reporting. MZM, or money zero maturity, is a calculation that contains zero-maturity financial assets and can be repaid immediately on par. The Federal Reserve relies heavily on MZM data, because its pace is a established inflation indicator.

M1 contains M0 plus the balance of all savings accounts that can be converted to equivalent value cash instantly. It is more than M0 as a basic economic theory is that there is not enough paper money in nature to cover the bank deposits of everyone, so the whole population does not want their accounts cashed and closed at the same time. So, M1 contains some "fake money" but it changes hands as if it were real cash in the working economy.

M2 is M1 plus all other depositor accounts that can be converted easily to equal-value physical cash. This includes all savings accounts , money market etc., and also some short-term investments. So, that is capital that might not be convertible immediately, but can be expected to maintain its value very quickly after a conversion. This money measure is no longer commonly referenced as the 30-day period is considered arbitrary; if there is any restriction on conversion to cash, it is not guaranteed to be "instantly available" and therefore not cash equivalent; any subdivision beyond that is only a function of time.

M3 is M2 plus all other investment instruments which can be converted into cash but which may have substantial constraints on a timely conversion and/or lack of guarantee that the specified value of the investment will be maintained in the conversion to cash. Therefore, M3 also covers the value of the stock and bond markets denominated in a specific currency, as well as the value of some types of futures contracts and options and virtually all "institutional" investments