Home > Economics FAQs Blogs > Could you explain the difference between narrow and broad money?
Could you explain the difference between narrow and broad money?
Relevant Topics
This question pertains to topics in Microeconomics, such as Monetary Policy, Money Supply
Definitions:
Narrow Money (M1): Narrow money refers to the most liquid forms of money, typically including currency in circulation and demand deposits, such as current accounts.
Broad Money (M2, M3, M4): Broad money includes narrow money and additional less liquid assets, such as savings accounts, money market funds, and possibly other short-term investment vehicles.
Detailed Explanation:
Narrow Money: It represents the most readily available forms of money for spending. It includes physical currency like coins and banknotes, along with balances that can be quickly converted into cash, such as current account balances.
Broad Money: This is a wider classification of money, including not just what is held in physical form but also various types of accounts that can be easily converted into cash. Broad money includes all components of narrow money, plus additional assets like savings accounts, time deposits, and sometimes marketable securities.
Differences:
Liquidity: Narrow money is more liquid, as it can be readily used for transactions, while broad money includes some less liquid assets.
Components: Narrow money typically includes only the most accessible forms of money, while broad money includes a wider range of financial assets.
Use in Economic Analysis: Narrow money is often used to analyse transactions and short-term economic activity, while broad money may be more relevant in understanding long-term economic growth and stability.
Recent:
United Kingdom:Narrow Money (M0/M1): In the UK, narrow money includes currency in circulation and reserves held by banks at the central bank.Broad Money (M4): Includes currency, current accounts, and various other deposits, representing a broader view of money supply.
Fact: As of February 2021, the UK M4 money supply was approximately £2.81 trillion.
United States:Narrow Money (M1): Consists of currency in circulation, demand deposits, and other checkable deposits.Broad Money (M2): Adds savings deposits, money market mutual funds, and other time deposits to M1.
Fact: As of February 2021, the US M2 money supply was approximately $19.41 trillion.
Fact: As of February 2021, the UK M4 money supply was approximately £2.81 trillion.
United States:Narrow Money (M1): Consists of currency in circulation, demand deposits, and other checkable deposits.Broad Money (M2): Adds savings deposits, money market mutual funds, and other time deposits to M1.
Fact: As of February 2021, the US M2 money supply was approximately $19.41 trillion.
Summary:
Narrow money (M1) refers to highly liquid assets, such as physical currency and demand deposits, whereas broad money (M2, M3, M4) includes those liquid assets plus other less liquid financial assets like savings accounts and money market funds. The distinction between narrow and broad money is significant for economists and policymakers to understand and manage the overall money supply within an economy. The examples of the UK and the US illustrate these concepts in practice, showing the specific composition and scale of narrow and broad money in these countries.
Whenever you're ready there is one way I can help you.
If you or your child are looking to Boost your A level Economics Grades in under 30 days, I'd recommend starting with an all-in-one support network where you get 24/7 access to a SuperTutor:
→ Join EdGenie 🧞♂️: Transform your A-Level Economics essays and exam marks (genuinely) with our comprehensive on-demand learning platform. This carefully curated course blends engaging content with effective exam techniques, the same ones that have empowered over 1,000 of my students to achieve an A or A* over the last 13 years.
Thanks for hopping on board EdGenie's Frequently Asked Questions!
I'm Emre, and I've got a big goal - to make A* education accessible to all A-level students.
And it Starts With You!
Emre Aksahin
Chief Learning Officer at Edgenie
Latest from our blog
Copyright © 2023
School
Join EdGenie 🧞♂️
Unlock Full Access to Examinable
Questions and Answers, Plus:
Questions and Answers, Plus:
- 600+ A* Tutorial Vault ⭐️
- 1-1 Live 24/7 SuporTutor Support 💬
- Live MasterClasses and EssayLabs 🎓
- Downloadable summary sheets 📄
Already a member? Log in
Subscribe to Wednesday Wisdoms
Get weekly updates on
A-Level Economics and Business insights right in your mailbox.
A-Level Economics and Business insights right in your mailbox.
Thank you!
Subscribe to the Edgenie newsletter!
Get weekly updates on the top news of the week, infographics, economic data, and more right in your mailbox.
Thank you!
Join EdGenie 🧞♂️
Unlock Full Access to Examinable
Questions and Answers, Plus:
Questions and Answers, Plus:
- 600+ A* Tutorial Vault ⭐️
- 1-1 Live 24/7 SuporTutor Support 💬
- Live MasterClasses and EssayLabs 🎓
- Downloadable summary sheets 📄
Already a member? Log in
30% discount offer!
30% discount offer!
Click the button to make this offer yours! Limited-time only!