M3 is considered by some economists to be an even better predictor of inflation. This is published quarterly rather than monthly and includes data on large liquid assets held by financial institutions. The M3 classification is the broadest measure of an economy’s money supply.
It is denoted as M2 (or M3) and can absorb income and spending shocks. Therefore, it satisfies the cautious demand motive as well. Moreover, due to the growing importance in the distribution of wealth, it also functions as a store of value. The M2 numbers provide important insight into the direction, extremity, and efficacy of central bank policy. The Federal Reserve’s dual mandate is price stability and maximum sustainable employment. One of the ways it works to maintain price stability is by manipulating the M2 money supply.
Money, which includes banknotes, coins, and overnight deposits, is present in M1. Examples of narrow money are coins and notes in circulation and overnight deposits. Broad money supply includes instruments such as money market fund shares or units and debt securities for up to two years. Narrow money (M1 & M2) in India includes all notes and coins in circulation and all demand deposit components. Broad Money (M3 & M4) in India includes all components in narrow money and commercial banks net time deposits, term deposits and term borrowings.
Broad Money vs. Narrow Money: Comparison Table
The currency held by the public increased by 8.2% since March-end 2020 and the savings and current account deposits decreased by 8%. Consider a Main Street bank as a microcosm of the economy as a whole. Local people are prospering lately, so they have more money to save. The bank keeps part of the deposits in a vault but lends most of it out to other individuals and businesses. The loans are repaid with interest, and the bank has more money to loan. For example, the central bank might engage in open market operations.
Difference Between Broad Money and Narrow Money
The account holder can convert those savings to cash at any time and instantly. The Federal Reserve tracks two distinct numbers on the nation’s money supply and labels them M1 and M2. Each category includes or excludes specific kinds of money. There was yet another number, M3, but its reporting was discontinued by the Fed in 2006.
- Less liquid assets would include those that are not easily convertible to cash and therefore not ready to use if needed right away.
- Understanding and managing the money supply is an essential tool for central banks and governments to steer their economies in the desired direction.
- In the United States, the most common measures of money supply are monetary bases, M1 and M2.
- M3 is called Broad money as along with liquid deposits it also includes time deposits thus making it a broad classification of Money.
Understanding Broad Money: Definition, Examples, and Economic Implications
• Broad money, also known as M3, is the most comprehensive measure of the money supply. • M3 includes all types of liquid assets that can be converted into cash or are easily sold for cash. • Broad money facilitates transactions, provides liquidity, and influences interest rates and inflation. • However, broad money has limitations and challenges, including inclusion of non-core deposits, double-counting, measurement issues, and lack of standardization. M3 includes coins and currency, deposits in checking and savings accounts, small time deposits, non-institutional money market accounts.
Financial Stability and Risks
Too much cash is seen as a warning sign what is broad money of a growing threat of inflation. Broad money is indicated as M3 or M4 while narrow money is indicated as M0, M1 or M2. Demand Deposits (DD) can be withdrawn on demand from banks. M3, M0, and MB are not separately represented in the Federal Reserve reports on money supply.
It emphasizes money as a store of value more so than as a medium of exchange, hence the inclusion of less-liquid assets in M3. Less liquid assets would include those that are not easily convertible to cash and therefore not ready to use if needed right away. Broad money is a monetary aggregate that includes deposits with an agreed term of up to two years and deposits redeemable with up to three months’ notice.
The meanings vary depending on the context in which we use the term. However, we might also use it when referring to just to the least liquid forms of money. Different countries define their measurements of money in slightly different ways.
In contrast, M2 contains financial assets that may not come with the option of easy convertibility into cash within a short period. The total currency and transaction deposit the general public holds with depository institutions. They are institutions that obtain funds predominantly from deposits made by the public, such as commercial banks, savings banks, savings and loan associations, credit unions, etc. M3 is called Broad money as along with liquid deposits it also includes time deposits thus making it a broad classification of Money.
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