The status of the money supply is categorized based on liquidity. Liquidity refers to how easily an asset or security can be bought or sold in the market without causing a significant change in its price. In the context of the money supply, different forms of money have varying degrees of liquidity.
1. **M0**: This includes physical currency such as coins and paper money issued by the central bank. It is the most liquid form of money because it is widely accepted and can be used for transactions without any delay.
2. **M1**: This category includes M0 plus demand deposits like checking accounts. While slightly less liquid than physical cash, it is still readily available for transactions.
3. **M2 and M3**: These categories include M1 plus savings accounts, time deposits, and other less liquid assets. They are not as easily accessible for transactions compared to M0 and M1.
By categorizing the money supply based on liquidity, economists can analyze how changes in the availability of money can impact economic activities such as spending, investment, and inflation.
