Define the following measures of aggregate money stock in South Africa: M1A, M1, M2, M3.
As in the case of the USA, in South Africa, we have the customary M1, M2, and M3 measures of money. Each of the measures of money is based on the relationship: M = C + D where M = money, C = currency and D = deposits. The measures of money differ as to which type of deposits are included in D. M1 is divided into two categories, namely M1A money aggregate and M1 money aggregate. Let’s first define M1A, M1 then will go for M2; the broad definition of money, and M3 the most comprehensive measure of money.
- M1A monetary aggregate – this category consists of cash, coins, and banknotes plus cheques and transmission deposits held by domestic, private, the non-bank sector at commercial banks. Cheques and transmission deposits are the type of deposits most commonly used for making payments. These deposits earn very low interest, if not at all.
- The M1 monetary aggregate – M1 consists of M1A plus demand deposits held by the domestic private sector with the banks. Demand deposits are deposits that can be converted into cash on demand. Holders of demand deposits can withdraw cash from the deposits accounts whenever they wish, these are the deposits from which payments can be made. Holders of demand deposits may order the bank to make transfer money from an account that has funds. M1 is referred to as the narrow definition of money since it includes all monetary demand deposits. It also confirms to the payment function and the amount of deposits is highly sensitive to the levels of interest rates. An increase in interest rate forces individuals to shift their funds from demand money deposits to interest-bearing deposits.
- M2: a broader definition of money. This consists of M1 plus deposits, which are almost money or near money. On top of M1, M2 includes the short-term and medium-term deposits which include saving deposits, saving bank certificates, and share investments held by the private domestic sector at monetary institutions, commercial banks, and savings institutions. These short-term and medium-term deposits have a maturity of 1 to 31 days and 32 to 180 days to maturity respectively, and there are not demand deposits because they cannot be turned into cash on demand. Short-term and medium-term deposits are not transaction deposits because they do not have a payment facility.
- M3: the most comprehensive measure of money. M3 is M2 plus long-term deposits held by the private domestic sector with monetary institutions. M3 includes negotiable certificates and promissory notes of the private sector. In SA M3 is the most reliable measure for the money stock. It is very expensive to convert long-term deposits into liquid cash, it will involve considerable time, effort, and cost to do so. As a result, M3 is stable than its components, and maybe a much better indicator of domestic spending.
