Money Supply Definition: How to Measure the Money Supply

In macroeconomics, the definition of money supply is the total amount of money available in an economy at a given time. Economists define the money supply measures by available liquid assets: currencies of cash and easily accessible funds, such as money in commercial bank deposits, checking accounts, and savings accounts. The measurement of money supply speaks to the possibility of economic growth rates, stock market performance, inflation rates, and more. The United States Department of the Treasury will keep close tabs on the Federal Reserve, the US money supply, and economic activity to take broader measures in determining interest rates and other monetary policies.

Governments issue types of money (coin and paper currency) through their central bank, which other financial systems and depository institutions (such as banks) then dole out according to reserve requirements and credit extension policies. Nations measure this money stock differently, and because the medium of exchange comes in a few different forms, a money supply’s monetary base can vary. These stages of measurement in the US are M1, M2, M3, and so on.

M1, also called narrow money, refers to a currency in circulation that bankers can easily retrieve from vaults, savings deposits, and checkable deposits in the banking systems. Traveler’s checks are also in M1. M2 is another measure of the money supply, including M1 plus short-term time deposits and some mutual funds, like money market funds. M3 extends further and includes long-term deposits typically associated with large corporations and their investments.

The money supply greatly influences the economy. For one, its value can dictate the velocity of money or how quickly people spend and exchange it. Smaller money supplies mean slower velocity rates and vice versa. Too high a money supply can signal inflation, with price levels rising as people theoretically have more available money to spend. In the Federal Reserve System, inflation can also mean raised interest rates. In times of lower money supply, people may demand deposits from the bank to have the cash to spend. Governments will keenly watch the money supply to adjust rates, pump money into the economy, and make changes as deemed necessary.

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