Current measures of money

Today the standard measures of money in all developed countries include the volume of currency and the volume of deposits at a point in time. Usually there are narrow and broad measures, distinguished by the type of deposits included in the definition of money. In the United States, the central bank tracks and reports on three measures of money, Ml, M2, and M3.

The narrowest measure of money, Ml, consists of currency, traveler's checks, non-interest-bearing checking accounts (called demand deposits), and interest-bearing checking accounts (called other checkable deposits). All the components of Ml are funds that are generally acceptable immediately for transactions and are naturally referred to by the Fed astransactions balances. They are pure media of exchange; in other words. Ml consists of perfectly liquid assets. The termliquidity refers to the ease and convenience with which an asset can be converted to a medium of exchange. Currency and checking accounts do not need to be converted to anything else to be used as a medium of exchange. They are already the medium of exchange.

A broader measure of money is M2, which consists of Ml plus savings deposits, small-denomination time deposits, (private) money market mutual funds (MMMFs), money market deposit accounts, and two smaller items used primarily by businesses: overnight repurchase agreements and overnight Eurodollars. All the non-M1 components of M2, callednontransactions balances, can be used for payments but usually with some delay. Certainly that is the case with savings and time deposits. Funds in other accounts, such as the money market deposit accounts and money market mutual funds, can be transferred by check, but there are limits on either the number or the size of checks that can be written against these accounts. Typically very few checks are written on these accounts, and the checks that are written are for major payments. Thus, the broader measure emphasizes the store-of-wealth (value) function more than the medium-of-exchange function.

Finally, M3 equals M2 plus balances of less-liquid accounts that are even less likely to be used for payments. These balances are large-denomination time deposits and institutional money market mutual funds as well as term Eurodollars and term repurchase agreements.

Questions:

1. Explain what M1, M2 and M3 mean.

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