Various definitions of money

M1
M1 is the strictest definition of money because it only includes the most obvious items:
currency in circulation, traveler’s checks, demand deposits, and other checkable deposits.
These are clearly money because they all serve as a medium of exchange. They can be used
in future without substantially losing their purchasing power.
Currency in circulation includes currency outside the Government Treasury, Central Bank, and
vaults of depository institutions. Traveler’s checks only include the outstanding checks issued
by nonbank institutions. Traveler’s checks issued by depository institutions are considered a
component of demand deposits. Checkable deposits consists NOW account and Automatic
Transfer Service (ATS) accounts at depository institutions.
M2
The definition of M2 contains M1 and overnight repurchase agreement (repo) issued by all
depository institutions. It also includes money market deposits accounts (MMDA), saving
deposits, small time deposits and money market funds. Excluded are individual retirement
accounts (IRAs) and Keogh balances at depository institutions and money market funds.
M3
M3 includes M2 plus large time deposits (CDs) issued by depository institutions and
Eurodollar CDs. M3 is a less liquid definition of money than the previous two.
L
L is the least liquid measure of money in use. It includes M3 plus saving bonds, commercial
paper, banker’s acceptance and short-term treasury securities.
15. The traveler’s checks of Non-Bank issuers amounted to Rs 610 billion, money market
mutual fund shares of Rs 700 billion, non-interest bearing demand deposits of Rs 3200 billion,
term Eurodollar of Rs 450 billing, automatic transfer from saving account of Rs 200 billion,
large time deposits of Rs 2400 billion, commercial paper of Rs 1100 billion, saving deposits of
Rs 1200 billion and government saving bonds of Rs 2000 billion.
a. Find M1, M2, M3, and L.
b. Prepare monetary aggregates and explain each of them.
Solution
Calculation of money components and monetary aggregate

Component Items Amount

Traveler’s checks 610
M1 Demand deposits 3200
Automatic transfer service 200
Total 4010
M1 4010
M2 Money Market Mutual fund 700
Saving deposits 1200
Total 5910
M2 5910
M3 Large time deposit 2400
Eurodollar CD 450
Total 8760
M3 8760
L Commercial paper 1100
Government saving bonds 2000
Total 11860