money supply

Examples of money supply in the following topics:

• Other Measurements of the Money Supply

  • In addition to the commonly used M1 and M2 aggregates, several other measures of the money supply are used as well.
  • In addition to the commonly used M1 and M2 aggregates, there are several other measurements of the money supply that are used as well .
  • It is M2 – time deposits + money market funds.
  • The different forms of money in the government money supply statistics arise from the practice of fractional-reserve banking.
  • The measures of the money supply are all related, but the use of different measures may lead economists to different conclusions.

• Measuring the Money Supply

  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.
  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.
  • Money supply data are recorded and published, usually by the government or the central bank of the country.
  • In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is a term relating to (but not being equivalent to) the money supply (or money stock) or the amount of money in the economy.
  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.

• The Equilibrium Interest Rate

  • In a economy, equilibrium is reached when the supply of money is equal to the demand for money.
  • Equilibrium is reached when the supply of money is equal to the demand for money.
  • Political gain: both monetary and fiscal policies can affect the money supply and demand for money.
  • In the case of money supply, the market equilibrium exists where the interest rate and the money supply are balanced.
  • Without external influences, the interest rate and the money supply will stay in balance.

• Measuring the Money Supply: M2

  • M2 is a broader measure of the money supply than M1, including all M1 monies and those that could be quickly converted to liquid forms.
  • There is no single "correct" measure of the money supply.
  • M2 is one of the aggregates by which the Federal Reserve measures the money supply .
  • This is because M2 includes the money market account in addition to all the money counted in M1.
  • Historically, the Federal Reserve has measured the money supply using the aggregates of M1, M2, and M3.

• Chapter Questions

  • Calculate the change in the M1 definition of the money supply if the Fed purchases $50,000 in U.S. government securities.
  • Compute the change in the M1 definition of the money supply if the Fed sells $10,000 in U.S. government securities.
  • Calculate the change in the M1 definition of the money supply if a person deposits $1,000 in cash into his checking account.
  • Compute the change in the M1 definition of the money supply if a person withdraws $5,000 in cash from his checking account.
  • Why does the Fed have trouble controlling the money supply?

• Measuring the Money Supply: M1

  • M1 captures the most liquid components of the money supply, including currency held by the public and checkable deposits in banks.
  • The Federal Reserve measures the money supply using three main monetary aggregates: M1, M2, and M3.
  • M1 is the narrowest measure of the money supply, including only money that can be spent directly.
  • The M1 money supply increases by $810 when the loan is made (M1=$1,710).
  • This creates promise-to-pay money from a previous promise-to-pay, inflating the M1 money supply (M1=$2,439).

• Defining Inflation

  • Instead, most economists agree that in the long run, inflation depends on the money supply.
  • Thus, increasing the supply of money increases the price levels.
  • In mathematical terms, the quantity theory of money is based upon the following relationship: M x V = P x Q; where M is the money supply, V is the velocity of money, P is the price level, and Q is total output.
  • Thus, an increase in the money supply requires an increase in the price level (inflation).
  • Instead, for example, an increase in the money supply could boost total output or cause the velocity of money to fall.

• The Demand for Money

  • While the demand of money involves the desired holding of financial assets, the money supply is the total amount of monetary assets available in an economy at a specific time.
  • Monetary policy also impacts the money supply.
  • Expansionary policy increases the total supply of money in the economy more rapidly than usual and contractionary policy expands the supply of money more slowly than normal.
  • In the United States, the Federal Reserve System controls the money supply.
  • The Fed can attempt to change the money supply by affecting the reserve requirement and through other monetary policy tools .

• Quantity Theory of Money

  • People's demand for money must equal the supply of money.
  • We denote the supply of money by MS and substitute it into the equation.
  • Supply and demand for money must equal each other because a central bank injects money into the economy that the public uses.
  • Public cannot use money that the central bank does not supply.
  • The interest rate ensures the supply and demand of money equal each other.

• The Money Multiplier in Theory

  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • When you think of money, what you probably imagine is commercial bank money.
  • The above equation states that the total supply of commercial bank money is, at most, the amount of reserves times the reciprocal of the reserve ratio (the money multiplier) .
  • Theoretically, then, a central bank can change the money supply in an economy by changing the reserve requirements.
  • A 10% reserve requirement creates a total money supply equal to 10 times the amount of reserves in the economy; a 20% reserve requirement creates a total money supply equal to five times the amount of reserves in the economy.