Question

M₃ measure of money supply is less liquid than that of M₂. Explain.

Answer 1

M₃ is less liquid than M₂ because M₂ contains M₁ (currency and demand deposits) plus savings-type deposits that can be readily used or converted into cash, whereas M₃ = M₁ + time (term) deposits, i.e., it adds funds that are locked for a fixed period. Currency and demand deposits are the most liquid, savings-type deposits are next, and time deposits are least liquid because they can normally be converted to cash only at maturity or only before maturity at a cost or delay; adding those time deposits makes M₃ a broader but less liquid aggregate than M₂.