Money Supply
The money supply is the total amount of money—currency and deposits—available in an economy at a particular point in time. It is a key variable in monetary economics and a central focus of monetary policy, because changes in the money supply are closely linked to changes in inflation, interest rates, and economic activity.[1]
Definition and measures
The money supply is typically measured using a series of monetary aggregates, which differ in how broadly they define money. The precise definitions vary between countries, but a common framework is:
| Aggregate | Components |
|---|---|
| M0 (base money) | Currency in circulation plus reserves held by banks at the central bank. |
| M1 | Currency in circulation plus demand (current) deposits. |
| M2 | M1 plus savings deposits and time deposits. |
| M3 | M2 plus large time deposits and other less liquid instruments. |
Narrow measures such as M1 emphasise money's role as a medium of exchange, while broader measures such as M2 and M3 also capture money's role as a store of value.[1]
Money creation
In modern economies, most money is created by commercial banks through lending, a process constrained by the monetary base, reserve requirements, and demand for credit. The relationship between base money and the broader money supply is summarised by the money multiplier:
- Money multiplier = Money supply ÷ Monetary base
Policy significance
The money supply is a key indicator monitored by central banks. Under a monetarist framework, associated with Milton Friedman, controlling the growth of the money supply is seen as the principal means of controlling inflation. Most central banks today, however, target interest rates rather than the money supply directly, though they continue to monitor money growth as an indicator.[1]