The%20Liquidity%20Spectrum

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The Liquidity Spectrum
Farmland, commercial real estate
Treasury bills, commercial paper
Ceramics, art, rugs, rare coins
Least liquid
Most liquid
Currency, checkable deposits
Government and corporate bonds, equities
Specialized equipment
Savings and time deposits
Home equity
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Measuring the money supply
To measurethe moneysupply, we sum upassets to
the far rightof the liquidity spectrum
MostLiquid
Non-money assets
money
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M1
M1 includes

• Currency in circulation
• Demand deposits at commercial banks
• Travelers checks
• Other checkable deposits including NOW accounts,
  ATS accounts, and checkable deposits at credit
  unions and mutual savings banks

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M2
M2 includes M1 plus

• Savings deposits
• Small time deposits (less than 100,000)
• Retail money market mutual fund balances

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The fractional reserve principle
Depository institutions are required by law
to hold a minimum fraction of their liabilities
on account at the FED

• Legislation
• Federal Reserve Act of 1913
• DIDMCA of 1982