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Could someone please explain to me why there are three measures for the money supply. Thanks!
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M1, M2 and M3 are referred to as the money aggregates which the Federal Reserve (The Fed) use to measure money and develop monetary policies (i.e., cuts or increases in interest rates). Because there has been substantial additions to the differing types of assets that a person may hold, the Fed decided on these three aggregates.

M1 = Currency + travelers checks + demand deposits (checking accounts)

M2 = M1 + small CDs + savings accounts + personal money market accounts

M3 = M2 + Large CD's + institutional money market mutual funds + repurchase aggreements + Eurodollars

The difference between these measures are important as the Fed will set policies aimed at a specific aggregate which they feel is in need of fine tuning.
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