money supply

(noun)

In economics, the money supply or money stock is the total amount of monetary assets available in an economy at a specific time.

Related Terms

Examples of money supply in the following topics:

  • Chapter Questions

    • Identify the changes to the monetary base and money supply if bad weather causes the float to increase.
    • Identify the changes to the monetary base and money supply if the U.S.
    • Identify the changes to the monetary base and money supply if the commercial banks reduce the amount of discount loans from the Fed.
    • Identify the changes to the monetary base and money supply if the U.S.

  • 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?

  • Money Supply Definitions

    • Economists use two approaches in defining the money supply: transaction and liquidity.
    • The Federal Reserve System defines money supply as M1, M2, M3, and L.
    • Many central banks in the world measure their money supply similarly to United States.
    • The Fed stopped publishing the M3 definition of the money supply on March 23, 2006.
    • Which definition of the money supply is the best?

  • The Fed's Balance Sheet

    • Unfortunately, the Fed can only influence the money supply because the public and banks also influence the money supply.
    • Before understanding how the money supply process works, we introduce the Fed's balance sheet.
    • Money supply has risen because you traded the T-bill for a demand deposit.
    • Then the money supply increases.
    • Furthermore, both the monetary base and the money supply decrease.

  • Open-Market Operations

    • For example, the Fed increases the M1 money supply by 3%.
    • Consequently, the Fed keeps buying T-bills until the M1 money supply expands by 3%.
    • The Fed has no control over the money supply because it focused on the interest rates.
    • The Federal Reserve increases the money supply by purchasing T-bills
    • The Federal Reserve decreases the money supply by selling T-bills

  • The Money Supply Multipliers

    • Unfortunately, a contracting money supply could trigger a recession.
    • Money multiplier equals the ratio between the money supply and the monetary base.
    • Money multiplier (m) equals the ratio between the money supply (M1) and the monetary base (B) or as M1= m x B.
    • Banks can weaken the ratio between the monetary base and money supply.
    • We derive the money supply multiplier for M2 similarly.

  • Multiple Deposit Expansion and Contraction

    • Money supply immediately expands by $10,000.
    • Money supply immediately expands by $10,000.
    • Did you notice the change in the money supply?
    • Did you notice the change in the money supply?
    • Thus, the money supply contracts by Equation 8.

  • Central Banks

    • Therefore, every country has a government institution that measures and influences the money supply.
    • The Federal Reserve regulates banks, grants emergency loans to banks, and influences the money supply.
    • Since the money supply and the financial markets are intertwined,the Fed can influence financial markets indirectly, when it affects the money supply.
    • When a central bank increases the money supply, it can create inflation.
    • Thus, an increasing money supply causes interest rates to fall in the short run.

  • 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.

  • Deflation

    • In the IS/LM model (Investment and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model), deflation is caused by a shift in the supply-and-demand curve for goods and services, particularly with a fall in the aggregate level of demand.
    • In monetarist theory, deflation must be associated with either a reduction in the money supply, a reduction in the velocity of money or an increase in the number of transactions.
    • It may be attributed to a dramatic contraction of the money supply, or to adherence to a gold standard or to other external monetary base requirements.
    • In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically: the supply of money going down and the supply of goods going up.
    • Historic episodes of deflation have often been associated with the supply of goods going up (due to increased productivity) without an increase in the supply of money, or (as with the Great Depression and possibly Japan in the early 1990s) the demand for goods going down combined with a decrease in the money supply.