Near Money

Definition

Near money refers to assets that are highly liquid and can be quickly converted into cash, but are not considered legal tender or part of the money supply. These assets provide many of the same functions as money, such as serving as a medium of exchange and a store of value, but are not as easily spendable as currency.

5 Must Know Facts For Your Next Test

1. Near money assets are not considered part of the official money supply, but they can be easily converted into cash and used for transactions.
2. Examples of near money include savings accounts, money market funds, and short-term government securities.
3. The inclusion of near money in measures of the money supply, such as M2, provides a more comprehensive view of the liquidity in the economy.
4. Near money assets typically offer a higher rate of return than currency, but they may also carry slightly more risk and be less liquid.
5. The distinction between money and near money is important for policymakers and central banks when analyzing and managing the money supply.

Review Questions

• Explain how near money differs from legal tender currency in terms of its functions and characteristics.
  • Near money refers to assets that are highly liquid and can be quickly converted into cash, but are not considered legal tender or part of the official money supply. Unlike currency, near money assets do not serve as a universally accepted medium of exchange and are not considered the most liquid form of money. However, near money assets can still fulfill many of the same functions as money, such as serving as a store of value and facilitating transactions, but with slightly less liquidity and ease of use compared to legal tender currency.
• Describe how the inclusion of near money in measures of the money supply, such as M2, provides a more comprehensive view of the liquidity in the economy.
  • The money supply measures M1 and M2 include not only currency and demand deposits, but also near money assets like savings accounts, money market funds, and short-term government securities. By including these near money assets, the M2 measure provides a more complete picture of the total liquid assets available in the economy. This is important because near money assets, while not as liquid as currency, can still be easily converted into cash and used for transactions. The inclusion of near money in M2 gives policymakers and analysts a better understanding of the overall liquidity and spending power in the economy, which can inform monetary policy decisions.
• Analyze the potential trade-offs between the higher returns offered by near money assets and their slightly lower liquidity compared to currency.
  • Near money assets, such as savings accounts and money market funds, typically offer higher rates of return than holding currency. This is because these near money assets often invest in short-term, low-risk securities that generate a small but steady stream of interest income. However, the trade-off is that near money assets are slightly less liquid than currency, meaning they may take a bit more time or effort to convert into cash. This slight reduction in liquidity is the price paid for the higher returns. Policymakers and individuals must weigh these trade-offs when deciding how to allocate their assets between currency and near money, considering their short-term liquidity needs and longer-term investment goals.

Related terms

Money Supply: The total amount of money in circulation in an economy, including currency, deposits, and other liquid assets.

Liquidity: The ease with which an asset can be converted into cash without losing value.

M1 and M2: Measures of the money supply that include currency, demand deposits, and other highly liquid assets.