What does M3 measure in the money supply?

M3 is a broader measure of the money supply that includes M2 plus certain other forms of liquid assets. Specifically, M3 comprises M2 (which includes cash, checking accounts, and easily convertible near money) and adds large time deposits, institutional money market funds, and other larger liquid assets held by financial institutions. This makes M3 a comprehensive gauge of the total money supply available in an economy, reflecting the most liquid forms of money as well as less liquid savings vehicles.

The reason M3 is crucial is that it captures the money that can be turned into cash relatively quickly, thus providing valuable insight into the overall liquidity available for spending and investment in the economy. By including deposits at non-bank institutions, M3 paints a fuller picture of how much money is readily available for economic activity, distinguishing it from narrower measures that focus solely on currency and immediate cash forms.