Monetary Aggregates: What is it, Types, Importance and MORE

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Today we want to talk to you about a very important issue for the economy and our professional and productive activity. It is about the Monetary Aggregates, which are those that determine the amount of money that circulates among us for the functioning of an entire society.

It is important that you know that, although it is a very specialized topic on monetary policy and central banks, it is a topic that directly touches matters that impact us on our companies and homes: amount of circulating money, inflation, banking activity and means of payment .

Keep reading, we are sure that you are going to learn about a very useful topic!

What is money?

Before starting our tour of the monetary aggregates, we need to help you understand what money is and what it means, and also what the money supply is about. All these elements have to do with the macroeconomic performance of the world where we live and work.

As you well know, the most important function that money has is that with it we can have a means of exchange or payment and collection, until now accepted by everyone. Bear in mind that if money had not advanced, we would still be using the rocky and ineffective barter system. Let’s continue, because this is not the only role it performs.

We want you to know that money is also a store of value. This means that you can count on an imperishable good you can accumulate and stop using it if you don’t need it. Too is a common unit of account with which we can measure the value of things (goods, services, products).

In addition to these functions of exchange, value and accumulation, money is also related to the price level with which we do our transactions in the markets.

With these brief notions, let’s now tell you what another topic is about that will help you understand even more everything about monetary aggregates. We will talk to you about the money supply.

What is the money supply?

When you hear about the money supply, you should know that it is about the total amount of money that exists in an economy. We want you to know that this amount is determined between the central banks and private banks and savings banks.

In addition to the coins and bills that you receive and keep, the money supply is also created by a more abstract money that are checking accounts and time deposits. And this is what we want you to learn in this article: it is about monetary aggregates in a general way.

What are the Monetary Aggregates?

Finally! We have already reached the central point of which we want to draw your attention. The monetary aggregates They are the elements that make up the money supply or money supply that represent “the financial assets” that you use for your transactions.

These are all those means of payment with which you exchange goods and services, as well as the store of value with which you save and form your capital. Therefore, you should know that it refers to the total money that is circulating in an economy.

Keep in mind that measures of money liquidity are involved, which are related to the means with which you make your payments or collect debts. It is important that you know that these means of payment of the economy are measured in relation to the liabilities of financial institutions. That is why it is very important that you contribute to the good health of your country’s banking system.

To further broaden the panorama on this issue, monetary aggregates represent a debt for the central bank, since it is the institution that issues the notes and coins. While, for you, they rather become an asset, since it is the money you use and save.

To close this point, we want to make sure that you maintain the concern of knowing about the monetary aggregates that affect your economy. That is why we want to inform you that so that you can find out about their situation and status all financial and credit institutions must keep the figures published and be transparent with this information.

Types of Monetary Aggregates

As you already know, a monetary aggregate contains different kinds of money depending on its liquidity. In other words, its ability to be cash (bills and coins).

That is why it is essential that you learn how they are used and thus be able to analyze the money supply. We tell you that there are three basic types of monetary aggregates defined by central banks:

  • M1
  • M2
  • M3

When you read M1 You should know that this amount expresses the set of bills and coins that are in circulation in the hands of the public.

With the M2 You should be aware that it integrates the sum of M1 plus short-term deposits:

  • savings books,
  • sight accounts and
  • daily repurchase agreements that occur in the financial system

About him M3 We tell you that it is an aggregate of M1, M2 with all the participations of funds in the money market and instruments of the money market. To give you an idea, it is about:

  • private and public bonds (treasury bills) issued with a maturity of up to two years,
  • term deposits and
  • forward repurchase agreements.

You can get these acronyms in some cases, depending on the size of the economies and the situation of the financial and banking system of a given country:

  • In the case of M0, you will see the total cash that is in the hands of the public (bills and coins) plus the bank accounts deposited in the Central Banks.
  • The M1 aggregate integrates M0 with deposits in checking accounts.
  • About the M2 we tell you that it contains the M1 plus the savings deposits.
  • When you read M3 you should know that it refers to M2 and term deposits (for example, in foreign currency).
  • The M4, which you will also know as Liquid Assets in the hands of the Public (ALP), is the totalization of the M3 with Other Liquid Assets (promissory notes and financial instruments with little liquidity).

We inform you in the same way, that in some countries the M4, M5 and M6 are also considered monetary aggregates.

Many experts use as a metaphor to explain how the additions to the famous Russian dolls, the matrioshkas. They serve as an image to show that being hollow inside and of different sizes, they are formed with each other (the largest contain the smallest, and so on). To make it clearer: The smallest wrist is the M0 and the largest of all the M4.

We suggest that, if you want to delve further into the aggregates, its structure and the balances that the Monetary Financial Institutions (MFIs) must give so that you have this information up to date, check for example information on the main pages central banks in the world.

Importance of Monetary Aggregates

Now that you have minimal language about Monetary Aggregates, we want to highlight its importance for your productive life and for the economy in general. Since you go shopping or use any means of payment, it is already a topic that should interest you.

Any monetary instrument that allows you to have liquidity or cash, whether it is in banknotes or plastic money, or if it is digital operations, and in this way, moving an entire economy and its financial and banking systems, is something that is done through the so-called monetary aggregates.

We want you to know some details of the importance of the subject from the point of view of experts and institutions that study it. For him Institute of Economic Investigations of the UNAM the aggregates allow you to know how much money there is in the financial system that you can divide it into two main categories:

  • What is available in circulation for the purchase of goods and services, and
  • how much is usable in the form of savings.

This information should be key for making decisions, for example about your savings and your investment activities. You see how useful it is for you to know everything about monetary aggregates!

To level macroeconomic it is also essential that you know it, because you will be able to compare yourself with companies or with other countries. Here you need to know two leading institutions on the subject:

We want it to be very clear to you that it is necessary for economies to control liquidity because unlimited money has terrible consequences for price stability and inflation. For this reason, central banks monitor the amount of liquidity through the aforementioned monetary aggregates.

It is also key that you know that you need to maintain healthy habits about the use of financial products offered by banks and their responsible use for the economy in general. It is the grain of sand with which you can contribute. This does not exclude that the monetary authorities also play their role well when controlling these macroeconomic variables.

We say goodbye confident that you will know how to use this information in the best way!

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