Question

Explain the difference between smaller monetary aggregates like M1+ and broader monetary aggregates like M2++? Which of them is used as a forecasting tool for higher economic activity?

Answer 1

Basically smaller monetary aggregates are the money circulating in an economy to satisfy its current monetary needs. There are two indicators for monetary Aggregates collected by the OECD: "narrow money"(M1); a means of exchnage and "broad money: (M3); a way to store value. And on the other hand the M3 classification is the broadest measure of an economy's money supply.It emphasizes money as a store-of-value more so than as a medium of exchange -hence the inclusion of less-liquid assets in M3.

In the higher economic activity the smalller monetary aggregates is used as a forecasting tool.One is that results showing that the monetary aggregates do improve forecast. With past inflation, so are long-run forecasts with short and medium-run forecasts.