How to Measure the Supply of Money

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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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