The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What is Money Supply?

2017-06-27T15:53:11+00:00

The term 'Money Supply' is included in the Banking edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

Where business and economics are concerned, the money supply proves to be the complete quantity of money that is available throughout the economy at any given moment in time. Money can be defined in a few different ways. The commonly accepted definitions are comprised of both circulating currency and demand deposits. Demand deposits are the assets of depositors in banks that are easy for them to access, such as checking accounts.

The statistical data on money supply is recorded and made available to the public by the government. In some countries, the central bank publishes such information. Analysts are always interested in any changes to the money supply total, since it has great impacts on inflation levels, prices, and the business cycle.

There are now several different measurements of money supply published within the U.S. These range from narrow to broad money supply totals. While narrower calculations only measure the most liquid of assets that are easy to spend, such as currency itself and checking account deposits, other broader measures include assets that are not so liquid, such as certificates of deposit.

The MB is the complete monetary base as it pertains to all currency. It proves to be the money supply figure that is the most liquid. M1 is the measure that leaves out bank reserves. M2 is the measurement that is given as the main economic indicator in figuring how high inflation will become. Both money and its near substitutes are included in this category. M3 used to be the main figure for money supply in the Untied States, until the Fed elected not to release it any longer after 2006. It included the M2 measure plus longer term deposits.

Inflation commonly results from changes to the money supply. The evidence demonstrates the direct correlation between the growth of the money supply and longer term rising prices. This is particularly the case when the money supply increase is rapid within an economy.

The latest example of how the growth of the money supply can ruin a currency and destroy an economy is demonstrated by Zimbabwe. This African country witnessed dramatic increases in the national money supply and then became a victim of hyperinflation, or a dramatic gain in prices. Because of this, the money supply has to be responsibly controlled and overseen.

The money supply is actually controlled through monetary policy. Central banks such as the Fed determine the money supply in part through their reserve ratios that they make banks observe with percent of deposits kept on hand. They can also adjust it with the interest rates that they set for the country.

Many critics have pointed to the rapid growth in the money supply of U.S. dollars in the years of the financial crisis and the Great Recession as dangerous. From the years of 2007-2010, the dollar money supply has been grown by in excess of three hundred percent. At the same time, the economy has a whole has barely grown. This is the consummate recipe for inflation, and many economists have suggested that you will see high inflation, and potentially even hyperinflation, within the United States in the next several years as a direct result.

The term 'Money Supply' is included in the Banking edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.