This type of monetary aggregate totals how much currency is
circulating in an economy at any given time, and it is monitored by the Federal
Reserve Bank because the sum affects everything from GDP and inflation rates to
repurchase agreements and the Fed's financial policies. Discover the definition
of money supply and the various methods for measuring it.
Money Supply Definition
Money supply is defined in macroeconomics as the total
amount of money available in an economy at any given time. Economists define
money supply measures in terms of available liquid assets, which include cash
currencies and easily accessible funds such as money in commercial bank
deposits, checking accounts, and savings accounts. Money supply measurement
speaks to the possibility of economic growth rates, stock market performance,
inflation rates, and other factors. The US Department of Treasury will closely
monitor the Federal Reserve, the US money supply, and economic activity in
order to make broader decisions about interest rates and other monetary
policies.
How Is the Money Supply Measured?
Governments create money (coins and paper currency) through
their central bank, which is then distributed to other financial systems and
depository institutions (such as banks) based on reserve requirements and
credit extension policies. Nations measure this money stock differently, and
because the medium of exchange comes in a variety of forms, the monetary base
of a money supply can vary. In the United States, these measurement stages are
known as M1, M2, M3, and so on.
M1, also known as narrow money, refers to circulating
currency that bankers can easily withdraw from vaults, savings deposits, and
checkable deposits in banking systems. M1 also accepts traveler's checks. M2 is
a measure of the money supply that includes M1 as well as short-term time
deposits and some mutual funds, such as money market funds. M3 goes even
further, including long-term deposits associated with large corporations and
their investments.
How Does the Money Supply Influence the Economy?
The money supply has a significant impact on the economy.
For one thing, the value of money can influence the velocity of money, or how
quickly people spend and exchange it. Slower velocity rates are associated with
smaller money supplies, and vice versa. A large money supply can indicate
inflation, with prices rising as people theoretically have more money to spend.
Inflation can also mean higher interest rates in the Federal Reserve System.
People may demand bank deposits in times of low money supply in order to have
cash to spend. Governments will closely monitor the money supply in order to
adjust interest rates, inject money into the economy, and make other necessary
changes.
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