Money Supply

Published Jan 7, 2023

Definition of Money Supply

Money supply is the total amount of money in circulation in an economy at a given point in time. That means, depending on the measure we look at, it includes all the currency and coins in circulation, as well as all the deposits in banks and other financial institutions.

Depending on what type of money is included, we can distinguish between three measures of supply, M1 (i.e., narrow measure), M2 (i.e., intermediate measure), and M3 (i.e., broad measure). Fore a more detailed explanation, check out our post (and video) about the three measures of money supply.

Example

To illustrate this, let’s look at the money supply of the United States. According to the Federal Reserve (FED), the total money supply M1 of the US in November 2022 was around USD 19.93 trillion (seasonally adjusted), while M2 was USD 21.35 trillion. The first number includes all cash in circulation, traveler’s checks, demand deposits at commercial banks (or other depository institutions) held by the public, and other checkable deposits. M2 includes everything in M1 as well as savings deposits, time deposits below USD 100,000, and balances in retail money market funds.

Why Money Supply Matters

The money supply is an important economic indicator because it affects the level of economic activity in an economy. An increase in the supply of money leads to an increase in economic activity, while a decrease in the money supply leads to a decrease in economic activity. Therefore, it is important for policymakers to keep an eye on the measures of it and adjust policies accordingly in order to maintain a healthy level of economic activity.