Session 3 · What Is Money? FIN310

M0/MB, M1, M2, M3 • who controls them • why they changed • charts • game • video • quiz • homework
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1) Overview — Money vs. Income vs. Wealth

  • Money = what you use to pay (means of exchange), a common unit of account, and a (imperfect) store of value.
  • Income = earnings per period; Wealth = what you own (assets – liabilities).
  • There isn’t one “correct” money measure. We use aggregates from narrow (most spendable) to broad (includes savings-type items).

2) Definitions — What is in M0/MB, M1, M2, M3?

M3 is not published by the Fed; the IMF/others estimate it. ✔ = included.
M2 = M1 + small CDs + retail MMFs MB = Currency + Reserves
ComponentM0MBM1M2M3*
Notes & coins held by the public (currency in circulation)✔✔✔✔✔
Vault cash at banks—✔———
Reserves at the Fed (required + excess)—✔———
Demand & other checkable deposits (OCDs)——✔✔✔
Savings deposits added to M1 post-2020——✔✔✔
Traveler’s checks (non-bank)——✔✔✔
Small time deposits (<$100k)———✔✔
Retail money market funds (MMFs)———✔✔
Large time deposits, institutional MMFs, short-term repos (other large liquid)————✔
*M3: broadest; estimated by IMF/others; useful for context but not an official Fed series.

3) “Does the Fed control M1/M2/M3?”

Short answer

No, not directly. The Fed controls policy tools (interest rates, QE/QT, reserve terms). People and banks decide where to hold money and how much to borrow/lend. Those choices determine the aggregates, with lags.

Connect to student life

  • Rates down → loans cheaper (student/auto) → more borrowing/spending → deposits can rise → M1/M2 often up.
  • Rates up + QT → cash moves to T-bills/MMFs; loan growth slows → deposits shrink → M2 often down.

4) Why did M1/M2 change so much in the last decade?

Three big drivers

  • 2020 reclassification: many savings counted inside M1 ⇒ one-time level jump.
  • Pandemic + policy (’20–’21): transfers + bank lending ↑ deposits ⇒ M1/M2 up.
  • QT + higher rates (’22–’23): deposits → MMFs/T-bills; loan growth slowed ⇒ M2 down, M1 flatter.

Plain-English link

Policy → price of money (rates) → household/bank choices → deposits move → aggregates move. The Fed moves tools; people and banks move the aggregates.

5) Practice — Money Supply Game

Play this quick sim, then answer the homework below.

Play the Game

5b) Interactive — Student Activities & Money Supply

Click a student activity on the left. Then press Show explanation to reveal a detailed breakdown for both the current (post-2020) and classic (pre-2020) definitions.

Current M1 (post-2020): C + D + S Classic M1 (pre-2020): C + D M2 = M1 + small CDs + retail MMFs MB = Currency + Reserves

Student Activity

Result (Arrows use Current M1)

MB

—

M1

—

M2

—
Choose an activity, then click “Show explanation”.
Select an activity first.

6) Watch — Khan Academy: Money aggregates

Tip: open the FRED charts below while you watch.

7) Charts — M0 (proxy) • M1 • M2 • M3 (2014-2024)

Each panel is a live FRED image. Click “Open on FRED” for interactive charts.

M0 (proxy: Currency in Circulation) Open on FRED
M0 proxy last decade
Using CURRCIR as a common M0 proxy.
M1 last decade
Currency + checkable deposits (2020 jump from reclassification).
M2 last decade
M2 = M1 + savings, small time deposits, retail MMFs.
M3 (IMF series) Open on FRED
M3 IMF last decade
Not a Fed-published series; IMF estimate hosted on FRED.

8) Quick Quiz — Money Aggregates

True/False • Auto-graded

🏦 Session 3 — Money Aggregates Quiz

Covers M0/MB, M1, M2, M3, reclassification, and deposit flows.

Open Quiz
Tip: Keep this open while you view the FRED charts above.

9) Homework

In ≤250 words: Suppose the Fed cuts rates on Sept 17 and slows QT. Will M1 and M2 likely rise or fall in the next few quarters, and why? Include one student-life example (loan APRs, savings/MMF yields, or part-time jobs).

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