Economists define money by its intended use.
In economics, measuring the total amount of money in circulation is necessary to measure economic activity and control inflation. Economists define different kinds of money .The kinds of money are defined by their intended use. That is, the kind of money is defined by whether the consumer intends to spend, save or invest it in the short term.
M1
The simple definition of M1 is that it is "spendable money." It is all the physical currency in dollars and cents plus money held in checking accounts. An easy way to identify M1 money is that it is any kind of item that can presented to a retailer for exchange. Savings, money market accounts and other amounts held in investment portfolios are not included in the definition of M1. These kinds of money must be withdrawn before presented for exchange.
M2
The category of M2 includes everything in M1 plus money in savings accounts, retirement accounts and time deposits less than $100,000. Time deposits are money market accounts and certificates of deposit at banks. Economists assume that accounts totaling less than $100,000 are meant for eventual consumption. That is, the consumer is saving it for a particular purpose, such as making a large purchase, and will withdraw and spend it in the long term.
M3
The definition of M3 includes M2 plus large time deposits over $100,000, Eurodollar deposits and institutional money market funds. This definition includes money where the eventual consumption is uncertain. That is, it is possible that this money will never be spent. Instead, its purpose may be simply for investments. The reason that time deposits greater than $100,000 are included only in M3 is that the owner of this money is likely only using the interest it earns as spendable funds. The principal will stay in the account indefinitely.
Discontinuation of M3
While economists still define and use M3, the Federal Reserve Board discontinued the publication of M3 figures in 2006, stating that M3 did not convey useful information about the economy. The global currency markets have become vastly complex, and M3 became a dumping ground for "everything else." The intent of the funds measured in M3 can no longer be accurately described with confidence, according to the Fed.
