Large denomination time deposits are included in:
A) M1.
B) M2.
C) M3.
D) L.
The correct answer and explanation is :
The correct answer is C) M3.
Explanation:
Time deposits refer to savings or fixed deposits that a bank holds for a set period, and they typically come in large denominations. These are categorized into different monetary aggregates based on their liquidity and the ease with which they can be converted into cash.
- M1:
M1 is the most liquid measure of the money supply. It includes:
- Currency in circulation (coins and paper money)
- Demand deposits (checking accounts)
- Other liquid assets such as travelers’ checks. Large denomination time deposits are not included in M1 because they are less liquid and cannot be immediately accessed like checking accounts or currency.
- M2:
M2 is a broader measure of the money supply that includes everything in M1, plus near-money assets that are slightly less liquid. These assets include savings accounts, small time deposits (under a certain limit, usually $100,000), and money market funds. Large denomination time deposits, typically defined as those over $100,000, are not included in M2, as they are considered to be less liquid than the assets in M2. - M3:
M3 includes all the components of M2, plus large denomination time deposits (those over $100,000), institutional money market funds, and other larger liquid assets. Therefore, large denomination time deposits are included in M3 because they represent a significant but less liquid portion of the money supply, falling under the broader category of assets that are part of M3. - L (Liquid Assets):
The L measure includes even more assets than M3 and focuses on assets that can be converted into cash. While large denomination time deposits are included in this broader category, M3 is the correct aggregate for most conventional economic assessments.
Thus, M3 is the correct classification for large denomination time deposits due to its inclusion of less liquid but large value financial assets.