What Is M3 Money?
When you think of how much money there is in all of the United States, you'd probably think of all the coins and bills there are. But when economists and bankers think of money, they have a different measure. In the United States they have three different ways of determining how much money there is, and they are called M1, M2 and M3.
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M1 and M2
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M1 is called a narrow definition of money. As you might expect, it includes coins and bills in circulation, and it also includes checking account deposits and travelers checks. Subtracted from this is the Federal Reserve Float. In November 2010, M1 was estimated to be $1.8 trillion. The M2 aggregate (as economists call it) is considered a broad definition of money. It includes all of M1 plus deposits in non-checking accounts, retirement accounts, time deposits less than $100,000, and retail money market funds. In November 2010, M2 was estimated to be $8.5 trillion.
M3
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M3 is the broadest monetary aggregate. It includes all of M2 (which includes all of M1), plus time deposits equal to or greater than $100,000, deposits at U.S. banks held outside the U.S., institutional money market funds and Eurodollar deposits. Eurodollars are U.S. dollar deposits held in non-U.S. banks.
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Why the Fed and Economists measure M1, M2 and M3
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The objectives of the Federal Reserve are to promote maximum employment, price stability and moderate long term interest rates. They do this by controlling the supply of money. When economists look at the relationship between employment, price stability and interest rates, they find different measures of money---especially M1 and M2---to be absolutely essential in policy-making.
M3 is History
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In March 2006, the Federal Reserve stopped measuring M3 because it was costly to do so. They found M3 was closely correlated to M2, meaning M3 predictably changed when M2 changed. When economists at the Federal Reserve built their statistical models, M3 did not help them as they developed policies to maximize employment, stabilize price, and moderate interest rates. The last published estimate of M3, in March 2006, was $10.3 trillion.
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References
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