What is Money Supply?
The ‘money supply’ is the total amount of monetary assets available, like currency in circulation and demand deposits convertible into cash, in an economy at a specific time. This definition may vary, as sometimes it is expanded to include longer-term and less liquid bank deposits.
There are several types of money within the money supply, generally grouped into M’s – M0, M1, M2 and M3. depending on the size and type of the account in which the instruments are kept. Commonly, M0 and M1 are known as narrow money and include only the amount of currency in circulation and anything that can be easily converted into cash.
M2 includes M1 plus short-time bank deposits and some money market funds. M3 includes M2 and long-term deposits. Money zero maturity (MZM), measures financial assets with zero maturity that can be immediately redeemable at par value. MZM is very important for the central banks, as its velocity is used as an indicator of inflation.
The analysis and monitoring of the money supply is a key part in the central banks’ strategies to manipulate the economy, as their monetary policies revolve around controlling the interest rates and increasing or decreasing the amount of money available. Their belief is that by controlling the money supply they can create economic stability in pursuit of low inflation and high employment.
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Category: Financial Glossary