Broad Money: Definition, About Calculation, Example, and Benefits

Authors define broad money at the beginning of many academic papers because of its ambiguous meaning. It is denoted as M2 (or M3) and can absorb income and spending shocks. Therefore, it satisfies the cautious demand motive as well.

Related Terms

This category includes M1 components, saving deposits, time deposits in small denominations (less than $100,000), and retail money market mutual fund shares. The Federal Reserve website of the U.S. government describes two forms of money supply, M1 and M2. The monetary base is the total amount of currency circulating in the economy and reserve balances. For example, deposits held by banks and other financial institutions at the Federal Reserve come under reserve balances.

Difference between Broad Money and Narrow Money

The term, which usually refers to M3, includes more than simply banknotes and coins. In other words, it means more than ‘narrow money.’ It is the most inclusive definition of the money supply. The term also includes bank money and any cash held in easily accessible accounts. In the realm of economics, the term «broad money» refers to a broad category of money and liquid assets that are held by the public, including central banks and other financial institutions. Broad money is also known as M3, which is the most comprehensive measure of the money supply in an economy.

Moreover, due to the growing importance in the distribution of wealth, it also functions as a store of value. Because the bank has $100 in extra reserves, it decides to lend them money to earn interest. The fractional banking system’s money multiplier is an important factor.

1. A narrow measure of the money supply that includes currency in circulation and demand deposits, such as checking accounts.
2. The word ‘net’ refers to the inclusion of solely public deposits held by banks in the money supply.
3. In conclusion, broad money is a crucial component of the money supply that plays a significant role in facilitating transactions, providing liquidity, and shaping the money creation process.
4. Economists have found close links between money supply, inflation, and interest rates.
5. Broad money is a measure of the total money supply within an economy, including both cash and various types of deposits.

In other words, the money supply is not black and white, but rather different shades of gray. In the United States, the most common measures of money supply are monetary base, M1 andM2. In March 2006, the Federal Reserve stopped publishing M3 statistics.

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. Repurchase agreements, shares or units of money market funds and debt instruments of up to two years also form part of this category. In simple terms, if there is more money available, the economy tends to accelerate because businesses have easy access to financing.

Random Glossary term

M2 Involves all the currencies in circulation and are financial assets used as means of exchange. They possess value when stored and have the capacity to absorb income and spending shocks. Maturity is a key factor that decides the elements of broad money. In some circumstances, the hierarchy of a group of money aggregates advances from the presence of short-term components to that of longer-term deposits or debt instruments in higher-ordered aggregates. In the United States, the most common measures of money supply are monetary bases, M1 and M2. The money-multiplier process illustrates how an increase in the monetary base leads to a doubled increase in the money supply.

1. Broad money is also known as M3, which is the most comprehensive measure of the money supply in an economy.
2. The wide money is obtained by adding the time depots to the narrow money.
3. M1 is the narrowest measure of the money supply, including only the most liquid forms of money such as currency in circulation and demand deposits.
4. The money supply does not include interbank deposits held by a commercial bank in other commercial banks.
5. In this context, broad money is one of the measures that central bankers use to determine what interventions, if any, they could introduceto influencethe economy.
6. Since wealth management is becoming increasingly important for high savers, the concept of broad money is becoming more and more crucial.
7. Narrow money refers to the most liquid forms of money in an economy, such as physical currency and checking deposits.

Definition and Composition of Broad Money

Broad money includes a broader range of bank deposits and other less liquid assets. Time deposits have a set maturity term and can’t be withdrawn before that time period expires. The wide money is obtained by adding the time depots to the narrow money. These are considered ‘near money’ because it can easily be changed to cash.

Broad Money and Narrow Money, Formula, Difference, M1, M2, M3, M4

M1 has the highest liquidity and is the easiest to deal with, whilst M4 has the least. In fact, it is the economic indicator we use to determine an economy’s liquidity. Monetary policy refers to the actions taken by a country’s central bank to influence the money supply and interest rates, with the goal of promoting what is broad money economic stability and growth. Economists have found close links between money supply, inflation and interest rates.Central banks such as theFederal Reserve use lower interest rates to increase the money supply when the goal is to stimulate the economy.

Nevertheless, narrow money is a metric that is unique to eachnation. An M that is then followed by one or more digits or a letter is used to denotenarrow money. Broad money is a comprehensive measure of the total money supply within an economy, including not only currency in circulation but also various types of deposits and other liquid assets.