Distinguish between M1 and M2. What are near monies?
Near manoies are deposits with a maturity of up to two years and deposits redeemable at a period of notice of up to three months.
M1 and M2 are different measures of the money supply in an economy. They reflect the amount of money in circulation and are commonly used by economists and policymakers to understand and analyze the overall health of an economy.
1. M1: M1 represents the narrowest definition of the money supply. It includes the most liquid forms of money, which are readily available for transactions. M1 consists of:
- Currency in circulation: This refers to physical currency, such as notes and coins, held by the public and not deposited in banks.
- Demand deposits: These are checking accounts held by individuals and businesses at banks, which can be readily accessed for payment or withdrawal.
2. M2: M2 is a broader measure of the money supply. It includes all the components of M1, but also adds additional types of assets that are highly liquid but not as immediately spendable as M1. M2 consists of:
- M1 components (currency in circulation and demand deposits)
- Savings deposits: These are accounts held at banks or other financial institutions that pay interest and have certain restrictions on withdrawal. They typically have minimum balance requirements and may require a notice for withdrawal (typically not exceeding three months).
- Time deposits: These are accounts with a fixed term and cannot be withdrawn before maturity without penalty. They typically have higher interest rates compared to savings deposits.
- Money market funds: These are mutual funds that invest in highly liquid, low-risk financial instruments, such as Treasury bills and short-term commercial paper.
Now, regarding your second question about near monies, near monies are financial assets that are easily converted into cash or used as a medium of exchange but are not classified as money. They are similar to M2 components in terms of liquidity and ease of conversion but are not directly included in the money supply measures. Examples of near monies include time deposits, savings deposits, and money market funds. These assets are not as readily available for spending as actual money (M1), but they can be easily converted into cash or used to make payments relatively quickly.