What is the difference between M2 and M3 money?

Moving on to M3, this measure of money supply expands upon M2 by including additional financial instruments that represent a claim on money or are readily convertible into money. One such addition is repurchase agreements, which are financial contracts where one party sells securities to another and agrees to repurchase them at a later date for a specified price.

Additionally, M3 incorporates shares or units of money market funds (MMFs). MMFs are mutual funds that invest in short-term, high-quality debt securities and offer investors the benefits of diversification and liquidity. By including MMF shares/units in M3, the measure accounts for the growing importance of these investment vehicles in the financial system.

Moreover, M3 also takes into account debt securities with a maturity of up to two years. These securities, such as treasury bills and corporate commercial paper, represent borrowings by governments, corporations, and other entities that need to raise funds for short-term needs. Their inclusion in M3 reflects their significant role in facilitating the Flow of money throughout the economy.

M2 is a broader measure of money supply that includes M1, which primarily comprises of physical currency in circulation and demand deposits held by individuals and businesses. In addition to M1, M2 incorporates deposits with an agreed maturity of up to two years. These deposits represent funds that individuals and institutions have placed in financial institutions for a specified period, with the intention of earning interest.

Furthermore, M2 also encompasses deposits that are redeemable at a period of notice up to three months. This category includes savings accounts and other types of deposits that allow holders to withdraw funds with relatively short notice, offering a balance between liquidity and potential returns.