money supply

(redirected from Money demand)
Also found in: Dictionary, Thesaurus, Encyclopedia.

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 ?
India's money demand function has been the subject of numerous quantitaive research efforts.
Therefore, we ignore the changing opportunity costs arising out of the high volatility of the Bitcoin exchange rate and an explicit modeling of this kind of money demand.
However money demand and money supply dynamics determines interest rates, which consequently impact a country's monetary policy objectives.
The organisation of this paper is as follows; the next section presents the brief literature survey on financial liberalisation and money demand, and financial liberalisation in Sri Lankan context.
Since financial globalization and financial liberalization have become important issues in developing countries, later studies have included foreign opportunity cost variables such as exchange rate and foreign interest rate into money demand models.
In contrast, money demand will decline in response to higher opportunity costs, as money holdings become more expensive relative to real and financial assets.
We emphasise from the outset that precisely what data should be used in the estimation of money demand functions is unclear and that a large part of the literature discuss the importance of alternative data definitions.
12) Finally, shocks to the monetary base and to the money multiplier can have no permanent effect on real money balances while real money demand shocks can, restrictions consistent with long-run monetary neutrality.
Ma-Cornac (1991) employing the OLS method of regression for Japan from 1975 to 1987 investigated the relation between money demand and stock prices.
During the past two decades the focus of researchers remained on the impact of monetary developments on money demand functions.
In this paper, we explain the key linkages between Friedman's work, including the relevance of a stable money demand function, and the strategy adopted by the ECB.
Keywords: Monetary Policy, Inflation, Interest Rate, Welfare Costs, Money Demand Functions