Money supply

From Traderpedia

Money supply can be defined as the quantity of money available within an economy available to purchase goods, services, and securities.

When thinking about a supply of money it is natural to think of the sum total of notes and coinage in an economy. That, however, is the money base, not the money supply. A starting point for the concept of money supply would be the sum total of deposit balances in all current accounts in a given economy.

[edit] Measurement

Because (in principle, anyway) money is anything that can be used in settlement of a debt, there are varying measures of money supply. The narrowest measures count only those forms of money held for immediate transactions. Broader measures include money held as a store of value. There are definitions applied to these varying measurement depths. They are most commonly named M0, M1, M2, and M3 (from most narrow to most broad). In the United States, these are defined as follows:

  • M0: The total of all coins and paper cash in circulation.
  • M1: M0 + the amount in checking or similar demand deposit accounts
  • M2: M1 + other savings account types, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
  • M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

[edit] The Central Bank

The supply of money can only increase if the money is first "printed" by the issuer of money, usually the government central bank or treasury.

Changes in the money supply can then be made by the central bank buying and selling government debt. The government debt can be bought directly from the government or from public holdings (primarily banks). This process by which the money supply is managed is known as open market operations.