money supply

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Related to Money stock: M1 Money Supply, M2 Money Supply

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 ?
The current Money Stock Statistics were first published in June 2008 (thus the actual values are only available since April 2008).
The agreement was sparked by a sharp increase in the rate of inflation in 1950 and early 1951 and the desire of Fed officials to halt the rise by limiting the growth of bank reserves and the money stock. Under the Accord the Fed agreed to continue to support the government securities market temporarily when the Treasury issued new debt, but yields were permitted to find their market levels as the Fed directed its focus toward containing inflation.
In recommending that the growth rate of the money stock be set at a constant 3 to 5 percent per year, he wrote:
In equilibrium, because of asset market segmentation, a change in the money stock has asymmetric effects on consumption of traders, [c.sub.r,t], and nontraders, [c.sub.i,t], and redistributes consumption between traders and nontraders.
One possibility, favored by Friedman, is to expand the money stock at a rate matching the potential growth rate of the economy.
Associated with an interpretation of inflation as a consequence of excess aggregate demand, monetary targeting theories developed within the monetarist tradition rely on the assumption that inflation is a demand phenomenon, with the demand pressures yielding from excessive money stock expansion (Friedman, 1956).
As regards monetary policy, it would be relevant to analyze the relationship between the money stock (M1) Money stock (M1): component currency, notes, demand deposits (subject to no term, means of payment always available).
Her conclusion with regard to monetary policy is unambiguously strong: changes in the money stock were "crucial to the recovery" (768).
In this article, we review implementability of both the optimal full-commitment and time-consistent Markov-perfect monetary policies when the policymaker uses a nominal money stock instrument.
Theoretically consistent VAR procedures of VCDs and IRFs to examine the dynamic interaction between the per capita output growth, and ratio of broad money stock (M2) to nominal GDP for Nigeria are applied.
These days, this ``funny-money'' created for private profit constitutes well over 95pc of our entire money stock in the UK.
Changes in M2, 2000:IVQ-2001:IVQ Percent Percent Component or M2 of change M1 21.6 14.8 Savings deposits 41.8 80.3 Small time deposits 18.2 -10.6 Retail money market mutual funds 18.4 15.5 Changes in M3, 2000:1VQ-2001:IVQ Percent Percent Component of M3 of change M2 67.9 54.9 Large time deposits 10.0 -1.6 Repurchase liabilities 7.4 3.7 Institutional money market mutual funds 14.7 42.9 SOURCES: Board of Governors of the Federal Reserve System, Federal Reserve Statistical Releases, "Money Stock and Debt Measures," H.6.