How does M2 differ from M3?

M2 differs from M3 in that M3 encompasses M2 while additionally including larger time deposits and institutional money market funds. M2 includes components such as cash, checking deposits, and savings accounts, which are accessible to individuals and can be quickly converted into cash. M3 expands on this by incorporating more significant financial instruments that are typically held by businesses and institutions, making it a broader measure of the money supply in the economy.

For example, larger time deposits often involve funds that are not as easily accessible as those in M2, such as fixed-term accounts. Moreover, institutional money market funds are typically larger investment vehicles that serve businesses or organizations rather than individual consumers. Thus, M3 provides a more comprehensive view of the overall liquidity available in the economy, making it important for analysis of monetary policy and economic conditions.