Step-by-Step Guide on Calculating M3 Manually

Calculate M3 (M3 berekenen) is the broadest measure of money supply in circulation and includes all components of M2 plus large-denomination ($100,000 or more) time deposits, institutional money market funds, short-term repurchase agreements, and other larger liquid assets. 

M3 is the broadest measure of money supply in circulation and includes all the components of M2 (M1 being the narrowest). It’s important to have an understanding of M3 because it can give central banks an indication of inflationary pressures in the economy. When demand for money is high, it can lead to inflationary pressures as people compete for a limited amount of money. By understanding M3, central banks can take steps to ensure that inflationary pressures don’t get out of hand.

M3 is important because it provides a more expansive view of the money supply than M2. By including all components of M2 plus other large liquid assets, M3 better captures the total amount of money in circulation that can be used to purchase goods and services or held as savings. 

The Components of M3 

M3 includes all components of M2 plus the following: 

• Large-denomination time deposits (>$100,000) 

• Institutional money market funds 

• Short-term repurchase agreements 

• Other larger liquid assets 

M3 also has a smaller impact on interest rates than M2 because the funds included in M3 are less likely to be withdrawn from savings and used for spending. As a result, small changes in the growth rate of M3 have a smaller effect on interest rates than similar changes in the growth rate of M2. 

How to Calculate M3 

The Federal Reserve does not directly publish data on the level of M3 in circulation. Instead, economists use a formula that estimates the level of M3 based on the components that make up this measure of money supply. The most common way to calculate M3 is: 

M3 = M2 + (large time deposits + institutional money market funds + short-term repurchase agreements) – (near-moneys) 

M3 is important because it provides a more expansive view of the money supply than M2. By including all components of M2 plus other large liquid assets, such as institutional money market funds and short-term repurchase agreements, M3 better captures the total amount of money in circulation that can be used to purchase goods and services or held as savings. Although small changes in the growth rate of M3 have a smaller effect on interest rates than similar changes in the growth rate of M2, understanding both measures is important for anyone who wants to get a complete picture of the money supply.

M3 is the broadest measure of money supply in circulation and it’s important to have an understanding of it because it can give central banks an indication of inflationary pressures in the economy. By adding up all the components of M2 plus large time deposits, institutional money market funds, short-term repurchase agreements, and other larger liquid assets, you can calculate M3.