What Is Money Supply? 

Money supply is the sum of all currencies and other liquid funds in a country’s economy on the reference date. The money supply includes all cash in circulation and all bank balances that can be easily converted into cash by account holders.

Governments issue banknotes and coins through the Central Bank or the Treasury, or a combination of both. To keep the economy stable, bank regulators increase or decrease the available money supply through policy changes and regulatory decisions.

KEY TAKEAWAYS

• Currency is the total amount of cash and cash equivalents such as bank accounts in circulation at any given time.
• For non-cash items such as credits and loans, changes in the money supply figure are taken into account.
• In the United States, the Federal Reserve tracks the monthly money supply.
• The Fed also influences the money supply through actions that increase or decrease the amount of cash in the system.
• Monetarists, who consider the money supply to be the main driver of demand in the economy, believe that an increase in the money supply will lead to inflation.

Money Supply Tracking

The Federal Reserve’s website shows the US money supply by month since 1999. (The Fed calls the money supply the money supply.)

Understanding The Money Supply

In the United States, the Federal Reserve, known as the Fed, is the policy-making body that regulates the money supply.

Its economists track the money supply over time to determine whether too much money flows, leading to inflation, or too little money, leading to deflation.

The Fed has several weapons it can use to keep economic growth at reasonable levels.

• It controls interest rates by setting the base rate charged to the country’s banks for government-funded overnight loans that keep the banking system running. Interest rates for all other loans are derived from these federal loan rates.
• Add or remove cash from the system by changing the amount sent to banks for use in lending to businesses and consumers.

$19.93 trillion

According to the Federal Reserve, the seasonally adjusted M1 money supply in November 2022 was 19.93 trillion.

 

Effect Of Money Supply On The Economy

An increase in the money supply generally lowers interest rates, which in turn creates more investment and puts more money in the hands of consumers, thereby stimulating spending. Companies respond by ordering more raw materials and increasing output. Increased business activity increases the demand for labor.

The opposite can happen if the money supply decreases or if its growth rate decreases. Banks are lending less, businesses are delaying new projects, and consumer demand for home and auto loans is falling. The evolution of the money supply has long been considered an important factor in economic activity and the business cycle. Schools of macroeconomic thought that focus primarily on the role of the money supply include Irving Fisher’s quantity theory, monetarism, and Austrian business cycle theory.

Historically, money supply measurements have shown a relationship between the money supply and inflation, and between the money supply and the price level.

However, since 2000, these relationships have become less predictable and less reliable as guides for monetary policy. The financial indicator, still widely used, is one of many economic indicators collected, tracked, and verified by economists and the Federal Reserve.

Money Supply Numbers: M1, M2, And Later

The Federal Reserve tracks his two different figures of the country’s money supply and calls them M1 and M2. Each category may or may not include certain types of money. There is another number, M3, but the Fed stopped reporting it in 2006.

There are also MOs and MBs, but these are generally in the main category rather than separate.

All categories are accounting for the amount of cash in the economy, but each category has a slightly different definition of “cash” or liquid assets

M1

M1, also known as tight money, is often synonymous with “money supply” in financial media reports. It is a tally of all notes and coins in circulation, whether in someone’s wallet or in a bank teller’s drawer, as well as other easily transferable equivalents. changed into categories. For example, a typical bank savings account is a cash equivalent. Account holders can convert these savings into cash at any time and instantly.

M2

M2 includes M1 plus short-term fixed deposits with banks and money market funds.

Less than one year is generally considered short-term.

M3, MO, MB

M3, MO, and MB are not shown separately in the Federal Reserve’s Money Supply Report.

• M3, now obsolete, consisted of M2 and long-term deposits. The Federal Reserve has determined that these figures do not add any really important information and are no longer useful for analysis. Four
• MO measures the actual currency and reserves in circulation. 
• The MB or monetary base is the total supply of money plus a portion of the commercial bank reserves held by the central bank. Both MO and MB are included in M1 and M2. 

The Federal Reserve releases the latest M1 and M2 money supply figures weekly and monthly. This figure has been widely reported by the financial media and published on the Fed’s website.

What Are The Determinants Of Money Supply? 

The large M1 or M2 numbers contain several components that are analyzed by economists to determine exactly how all that money is flowing through the system and where problems may be. Economists call these components the determinants of the money supply. They understand:

• Foreign currency deposit interest rate. It is the amount of money that the public holds in their hands instead of in a bank. 
• Reserve rate. This is the amount of money that the Federal Reserve requires the bank to keep in its vault in order to satisfy all potential withdrawals from its customers, even in the event of a withdrawal by the bank. 
• Excess reserves. This is the amount of money that banks have available to lend to businesses and individuals.

What Happens When The Federal Reserve Limits The Money Supply? 

A country’s money supply has a significant influence on that country’s macroeconomic profile, especially with regard to interest rates, inflation, and the business cycle. In the US, the Federal Reserve is responsible for the money supply. When the Fed restricts the money supply through restrictive or “hawkish” monetary policy, interest rates rise and borrowing costs rise.

There is a delicate balance between these decisions. Restricting the money supply can slow inflation, as the Fed wants. But there is also the risk that it will slow economic growth, leading to higher unemployment.

How Is The Money Supply Determined?

The central bank regulates the amount of money available in the country. Through monetary policy, central banks can pursue expansionary or contractionary policies.

• An expansionary policy aims to increase the money supply. For example, central banks can conduct open market operations. That is, buying US Treasury bills with the newly issued currency. So this money is in circulation. 
• A contractionary policy would require the sale of government bonds. This removes some of the money circulating in the economy.

What Is The Difference Between M0, M1 And M2? 

The US money supply is reported in two main categories, M1 and M2. MO is included in both M1 and M2.

• MO is the total value of banknotes and coins in circulation plus the current level of central bank reserves. 
• M1 is the most reported heading number. MOs and money held in regular savings accounts and traveler’s checks. 
• M2 is all M1 plus money invested in short term assets like some certificates of deposit he matures in less than a year.

Why Is The Money Supply Expanding Or Contracting?

Think of Main Street Bank as a microcosm of the entire economy. Locals are doing well these days, so more money is being saved. you bank it. Banks keep a portion of their deposits in vaults, but lend most of it to other people and businesses. Loans are paid back with interest, allowing banks to borrow more money. Times are good and the money supply is increasing.

But what happens when the time is not so good? Bank deposits are declining because people are losing their livelihoods, or worse, their jobs. Banks have little money to lend. In any case, businesses and individuals are hesitant to spend large amounts due to the bad economic situation. Money supply is declining.

Final result

The money supply is perhaps one of the most concrete and understandable subjects in economics. All of the cash that circulates throughout the US economy matters. From every dollar and coin to the change people have in their pockets.

Analyzing numbers is more difficult. Economists want to know exactly where that money is and how it’s being spent. Is it hoarded or wasted? Have you invested in or spent on daily necessities?

The Federal Reserve will examine the money supply for possible action. Should we put more money into the economy to encourage spending, investment and job creation, or should we pull back and slow down the flow of money through the system to avoid inflation? The 

Federal Reserve releases money supply figures on the fourth Tuesday of each month, usually at 1:00 p.m. Easter time.