What Is the Money Supply?

The money supply is the sum total of all of the currency and other liquid assets in a country's economy on the date measured. The money supply includes all 澳洲幸运5官方开奖结果体彩网:cash in circulation and all bank deposits that the account holder can eas꧙ily convert to cash. To keep the econꦺomy stable, banking regulators increase or reduce the available money supply through policy changes and regulatory decisions.

Understanding the Money Supply

In the United States, the 澳洲幸运5官方开奖结果体彩网:Federal Reserve, known as the Fed, is the policy-making body that regulates the mone♑y supply. Its ec🔯onomists track the money supply over time to determine whether too much money is flowing, which can lead to inflation, or too little money is flowing, which can cause deflation.

The Fed has a couple of tools𝔉 it can use to keep the economy growing at a reasonable pace.

• It controls interest rates by setting the key rates it charges to the nation's banks for overnight loans of government money. The rates for all other loans are derived from those federal lending rates.
• It adds or removes cash from the system by changing the amount of money that flows to banks for use in loans to businesses and consumers.

The money supply is tracked over time as a key factor in analy🐎zing the health of the economy, pinpo🐭inting its weak spots, and developing policies to correct weaknesses. The Fed generally refers to the money supply as the money stock in its public releases.

Effect of the Money Supply on the Economy

An increase in the supply of money typically lowers interest rates, which generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more 澳洲幸运5官方开奖结果体彩网:raw materials and increasing production. The increased 澳洲幸运5官方开奖结果体彩网:business activity raises the demand for labor.

The opposite can occur if the money supply fall🍷s or when its growth rate declines. Banks lend less, businesses put off new projects, and consumer demand for h꧂ome mortgages and car loans declines.

Change in the money supply has long been considered a key factor in driving economic performance and business cycles. Macroeconomic schools of thought that focus heavily on the role of money supply include Irving Fisher's 澳洲幸运5官方开奖结果体彩网:Quantity Theory of Money, 澳洲幸运5官方开奖结果体彩网:Monetarism, and 澳洲幸运5官方开奖结果体彩网:Austrian Business Cycle Theory.

Hisꦿtorically, measuring the money supply has shown that there are relationships between money supply and inflation and between money supply and price levels.

However, since 2000, these relationships have become less predictable, reducing their reliability as a guide for monetary policy. Although money supply measures are still widely used, they are among many economic measures that economists and the Federal Reserve collect, track, and review.

The Money Supply Numbers: M1, M2, and Beyond

The Federal Reserve tracks two distinct numbers on the nation's money supply and labels them M1 and M2. Each category includes or excludes specific 澳洲幸运5官方开奖结果体彩网:kinds of money. There was yet another number, M3, but its report𒁏ing was discontinued by the Fed in 2006.

There are also M0 and MB, b🤡ut these are generally included in the main categories rather than being reported separately.

All of the categorieꩲs account for the amount of cash in the economy, but each category has a slightly different definition of cash or liquid assets.

M1

M1, also called narrow money, is often synonymous with money supply in reports from the financial media. This is a count of all of the notes and coins that are in circulation, whether they're in someone's wallet or a bank teller's drawer, plus other money equivalents that 🌳can be converted easily to cash.

For example, a regular bank savings account is a money equivalent. The account holওder can convert those savings to cash at any time and instꦡantly.

M2

M2 includes M1 plus short-term 澳洲幸运5官方开奖结果体彩网:time deposits in banks and money market funds. Generally, terms of less than🧔 a year are considered shor𓄧t-term.

M3, M0, and MB

M3, M0, and MB are not separately represented in the Federal Reserve report✅s on money suಌpply.

• M3, now discontinued, included M2 plus long-term deposits. The Federal Reserve decided that it added no real information of importance to the numbers and was no longer useful in its analysis.
• M0 measures real cash in circulation and 澳洲幸运5官方开奖结果体彩网:bank reserves.
• MB, or money base, is the total supply of currency plus the stored portion of commercial bank reserves at the central bank. Both M0 and MB are incorporated in M1 and M2.

The Federal Reserve releases the latest numbers on M1 and M2 money supplies weekly and monthly. The numbers are reported widely by the financial media and are published on the Fed's website.

What Are the Determinants of the Money Supply?

The large numbers of M1 or M2 contain components that economists analyze to determine how money flows through the system and where problems might arise. Economists speak of thes𝐆e components as the determinants of🥀 the money supply. They include the:

• Currency deposit ratio: This is the amount of cash that the public at large is keeping on hand rather than depositing in banks.
• 澳洲幸运5官方开奖结果体彩网:Reserve ratio: This is the amount of cash that the Federal Reserve requires a bank to keep in its vaults to satisfy all potential withdrawals by its customers, even in the event of a run on the banks.
• Excess reserve: This is the amount of money that the banks have available to lend out to businesses and individuals.

The Bottom Line

The money supply may be one of the most tangible and understandable subjects in economics. It's a count of every bit of cash floating around the entire U.S. economy. Every dollar and every coin, down to the small change that people have in their pockets.

Analyzing th🌃e number is harder. Economists want to know precisely where that money is and how it is being used. Is it being hoarded or splurged? Invested or spent on day-to-day necessities? The Federal Reserve considers the money supply when evaluating what kind of monetary policy to enact.