What does M3 encompass in terms of money supply measurement?

M3 encompasses M1 and M2 as part of its measurement of the money supply. To understand this, it's essential to define what M1 and M2 include.

M1 is the most liquid form of money and includes physical currency (coins and paper money), demand deposits (checking accounts), and other liquid assets. M2 includes everything in M1 plus near-money assets that can easily be converted into cash, such as savings accounts, time deposits, and money market accounts.

M3 further expands on M2 by including large time deposits, institutional money market funds, and other larger liquid assets, making it a broader measure of the money supply.

The inclusion of both M1 and M2 in M3 allows for an understanding of not only the cash readily available in the economy but also the easily liquidated assets that can be utilized as money. This broad perspective is important for analyzing overall economic health and monetary policy.