Definition Of Money Supply
Economics notes
Definition Of Money Supply
➡️ Money supply is the total amount of money available in an economy at a given time. It includes currency in circulation, deposits held in banks, and other liquid assets.
➡️ Money supply is an important economic indicator, as it affects the level of economic activity, inflation, and interest rates. An increase in money supply can lead to increased economic activity, while a decrease can lead to a slowdown in economic activity.
➡️ Central banks use monetary policy to control the money supply, by setting interest rates, buying and selling government bonds, and other measures. This helps to maintain economic stability and promote economic growth.
What is the definition of money supply?
Money supply refers to the total amount of money in circulation in an economy, including physical currency, demand deposits, and other liquid assets that can be easily converted into cash.
How is money supply measured?
Money supply is typically measured using various monetary aggregates, such as M1, M2, and M
M1 includes physical currency, demand deposits, and other highly liquid assets, while M2 includes M1 plus savings deposits, time deposits, and other less liquid assets. M3 includes M2 plus large time deposits and other institutional money market funds.
Why is money supply important in economics?
Money supply is a key determinant of inflation and economic growth. An increase in the money supply can lead to inflation, as more money chases the same amount of goods and services. Conversely, a decrease in the money supply can lead to deflation and a contraction in economic activity. Central banks often use monetary policy tools, such as adjusting interest rates and open market operations, to manage the money supply and achieve their macroeconomic objectives.