The Money Supply-Monetary Aggregates

The Fed identifies three dissimilar mechanism of the overall money provide:

1. M1.   This is the narrowest grouping, consisting of only checks, money, demand deposits, and traveler's checks. Of the entire category, M1 has the maximum liquidity.

2. M2.   This category includes all M1 money, but also includes savings, deposits under $10,000, money market deposit accounts, money market shared account balances, overnight repurchase agreements, and overnight Eurodollar deposits (which are deposits in U.S. dollars held in distant banks, not to be perplexed with Euros as a currency).

3. M3.   This grouping contain all M2 but also include term deposits for repurchase agreements (very short-term Treasury loans to dealer collateralized with bonds), and Eurodollar deposits, as well as dealer-only money market finances.

The provider of these aggregate obtainable to the communal is monitored through the joint behavior of the Federal Reserve and the commercial banks. Commercial banks make the decision to make longer credit to a meticulous individual or company base on the amount of capital they have to let somebody use. The Fed determines the reserve rates the banks must maintain on out- standing deposits, thereby reducing the amount of capital obtainable to that bank to lend to credit customers.