Prior to determining an appropriate economic policy, economists must have an idea of the amount of money that is in circulation, along with the amount of other types of assets that will provide access to cash. Economists gauge the money supply using three measures. They are:

  • M1
  • M2
  • M3

M1

M1 is the largest and most liquid measure of the nation’s money supply and it includes:

  • Cash
  • Demand deposits (Checking accounts)

M2

Includes all the measures in M1 plus:

  • Money market instruments
  • Time deposits of less than $100,000
  • Negotiable CD exceeding $100,000
  • Overnight repurchase agreements

M3

Includes all of the measures in M1 and M2 plus

  • Time deposits greater than $100,000
  • Repurchase agreements with maturities greater than 1 day

Disintermediation

Disintermediation occurs when people take their money out of low yielding accounts offered by financial intermediaries or banks and invest money in higher yielding investments.

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