Near-Monies: Implications

Near-monies are important for several related reasons.

1. Spending Habits. These highly liquid asserts affect people’s consuming-saving habits.

Usually, the greater the amount of financial wealth people hold as near-monies, the greater is their willingness to spend out of their money incomes.

2. Stability. Conversion of near-monies into money or vice versa can affect the economy’s stability. For example, during the prosperity-inflationary phase of the business cycle, converting noncheckable deposits into checkable deposits or currency adds to the money supply which could increase inflation. Such conversions can complicate the task of monetary authorities in controlling the money supply and the level of economic activity.

3. Policy. The specific definition of money used is important for monetary policy. For example, the money supply as measured by M₁ might be constant, while money defined as M₂ might be increasing. If the monetary authorities feel it is appropriate to have an expanding supply of money, the narrow M₁ definition would call for specific actions to increase currency and checkable deposits. But the broader M₂ definition would suggest that the desired expansion of the money supply is already taking place and that no specific policy action is required.

2.Comprehension check.

Working in pairs, answer the questions.

a) What items constitute the M1 money supply?

b) What is the most important component of the M1 money supply?

c) What are near-monies?

d) What items constitute the M2 money supply?

e) What are the components of the M3 money supply?

f) Of what significance are near-monies?