money supply

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Money supply

Money Supply

A measure of the total amount and value of money in an economy. There are various ways of calculating the money supply. The most conservative includes only currency in circulation and instruments that can be converted to currency on demand (e.g. the amount in a checking account). Other calculations are much broader and include comparatively illiquid assets, such as money market funds. Central banks control the money supply in their own countries. See also: M0, M1, M2, M3, M4.

money supply

The amount of money in the economy. Since the money supply is considered by many to be a critical element in determining economic activity, the financial markets attach great importance to Federal Reserve reports of changes in the supply. For example, consistently large increases in the money supply bring fears of future inflation. There are a variety of measures of the supply of money depending on how strictly it is defined. Also called money stock. See also M1, M2, M3, monetarism.

Money supply.

The money supply is the total amount of liquid or near-liquid assets in the economy.

The Federal Reserve, or the Fed, manages the money supply, trying to prevent either recession or serious inflation by changing the amount of money in circulation.

The Fed increases the money supply by buying government bonds in the open market, and decreases the supply by selling these securities.

In addition, the Fed can adjust the reserves that banks must maintain, and increase or decrease the rate at which banks can borrow money. This fluctuation in rates gets passed along to consumers and investors as changes in short-term interest rates.

The money supply is grouped into four classes of assets, called money aggregates. The narrowest, called M1, includes currency and checking deposits. M2 includes M1, plus assets in money market accounts and small time deposits.

M3, also called broad money, includes M2, plus assets in large time deposits, eurodollars, and institution-only money market funds. The biggest group, L, includes M3, plus assets such as private holdings of US savings bonds, short-term US Treasury bills, and commercial paper.

money supply

the stock of MONEY in an economy. The money supply can be specified in a variety of ways: narrow definitions of the money supply include only a limited number of assets, while broader definitions extend the range of assets included; for example, the ‘M0’ (narrow) money supply comprises currency (notes and coins), COMMERCIAL BANKS' till money and their operational balances at the Bank of England; ‘M3’ (broad) money supply is made up of M0 plus sight and time deposits with the commercial banks and UK public sector sterling deposits; and ‘M4’ is made up of M3 plus deposits with the building societies.

The size of the money supply is an important determinant of the level of spending in the economy and its control is a particular concern of MONETARY POLICY. However, the monetary authorities have a problem because given the number of possible definitions of the money supply, it is difficult for them to decide which is the most appropriate money supply category to target for control purposes. Moreover, having targeted a particular definition they face the added difficulty of actually controlling it because of the potential for asset switching from one category of money to another.

For most of the 1980s the authorities targeted M3 for control purposes, but in recent years have switched to M0 and M4 as ‘indicators’ of monetary conditions in setting ‘official’ INTEREST RATES (see MONETARY POLICY COMMITTEE). See LEGAL TENDER.

money supply

the amount of MONEY in circulation in an economy. Money supply can be specified in a variety of ways (see Fig. 127 ), and the total value of money in circulation depends on which definition of the money supply is adopted. ‘Narrow’ definitions of the money supply include only assets possessing ready LIQUIDITY (that is, assets that can be used directly to finance a transaction - for example, notes and coins). ‘Broad’ definitions include other assets that are less liquid but are nonetheless important in underpinning spending (for example, many building society deposits have first to be withdrawn and ‘converted’ into notes and coins before they can be spent).

The size of the money supply is an important determinant of the level of spending in the economy, and its control is a particular concern of MONETARY POLICY. The monetary authorities have a problem, however, because, given the number of possible definitions of the money supply, it is difficult for them to decide which is the most appropriate money supply category to target for control purposes. Moreover, having targeted a particular definition, they face the added difficulty of actually controlling it because of the potential for asset-switching from one category of money to another. For example, if the authorities target M3 (mainly currency plus bank deposits) for control purposes, this may not be sufficient in itself to reduce spending. Spenders may simply use their building society deposits (M4 type money) or national savings (M5 type money) to finance current purchases.

In the 1980s the UK government, as part of its MEDIUM-TERM FINANCIAL STRATEGY, set ‘target bands’ for the growth of, initially, sterling M3 and later M0. In recent years, formal targeting of the money supply has been abandoned, although the authorities have continued to ‘monitor’ M0, together with M4, as ‘indicators’ of general monetary conditions in the economy in setting ‘official’ INTEREST RATES (see MONETARY POLICY COMMITTEE). See LEGAL TENDER.

References in periodicals archive ?
It turned out that monetary aggregates were difficult to control and attempting to do so caused a significant rise in the volatility of interest rates and inflation.
If velocity is variable and unpredictable, the relationship between money and prices is difficult to characterize, and monetary aggregates can't help policymakers track inflation.
In particular, we argue that technological innovation and changes in regulatory practices in the past two decades have made other monetary aggregates as liquid as M1, so that the measure of money should be adjusted accordingly.
What is required is a monetary aggregate that can endogenously respond to changes in wealth holder preferences, possibly caused by financial innovations, which impinge on the information content of monetary aggregates or their sub components.
The research, using interest rates in addition to monetary aggregates as an indicator for monetary policy, provides support for a monetary source for the economic contraction.
Central banks around the world became convinced of the importance of money as a policy control variable and confident in the use of monetary aggregates as intermediate monetary targets just at a time when everything started to go embarrassingly wrong.
Credit remained extremely easy for most borrowers to obtain; intermediate- and long-term interest rates were at relatively low levels; equity prices soared higher, despite some disappointing earnings reports; and growth in the monetary aggregates was rapid.
Some analysts argued that the continued high growth of broader monetary aggregates like M2 and M3 was a truer reflection of monetary policy during this period [ILLUSTRATION FOR FIGURE 2 OMITTED].
Regarding the last item, they point out that "from October 1979 through October 1982, the Fed placed greater emphasis on managing the growth of the monetary aggregates and allowed interest rates to vary more than before, drastically reducing the elasticity of the money supply.
THE MONETARY AGGREGATES have for some time been an integral part of the design and implementation of monetary policy by the Federal Reserve.
Traditionally, these monetary aggregates are basically the simple-sum aggregates and they are computed by adding the currency and other financial assets linearly and by assigning equal weights to each of them.
The Committee also said that inflation in 2013 had revealed the constancy of Mozambique s currency, the metical, on the domestic foreign exchange industry, the development of monetary aggregates alongside a suitable provide of fruit and vegetables on the market following the revival of the agricultural industry after flooding.