What is Money Supply?

Summary

The money supply, referring to the total monetary assets available in an economy at a given time, is a critical factor in economic health. Measured through currency in circulation and demand deposits, it influences inflation, the business cycle, and the pricing of goods and services. A rapid increase in money supply can lead to long-term inflation, reducing money's purchasing power. Different economies categorize their money supply variably (e.g., EM0, EM1, EM2), reflecting their liquidity measures. Typically, an increased money supply lowers interest rates, stimulating consumer spending and boosting employment, while a decrease can have the opposite effect.

Takeaways

• 💰 The money supply refers to the total amount of monetary assets available in an economy at a specific time.
• 📊 Money supply is measured by monitoring currency in circulation and demand deposits, typically published by a nation's government or central bank.
• 🌍 All circulating currency and liquid instruments in a national economy constitute its money supply.
• 📈 Money supply directly impacts inflation, the business cycle, and the overall price level of goods and services.
• 🔗 There is a strong correlation between the growth of the money supply and long-term price inflation.
• 📉 Inflation represents a general increase in prices and a decline in the purchasing value of money.
• ⚠️ A rapid increase in the money supply often leads to a rise in long-term inflation rates.
• 💵 Different forms of money supply exist, such as EM0 and EM1 (narrow money), which include coins and notes in circulation.
• 🏦 EM2 expands on EM1 to include short-term bank deposits and 24-hour money market funds.
• 📉 Interest rates typically fall when the money supply increases, stimulating spending and boosting employment.

Q & A

What is meant by 'money supply'?

Money supply refers to the total amount of monetary assets available in an economy at a given time, including currency in circulation and demand deposits.

How is money supply typically measured?

Money supply is measured by monitoring the currency in circulation and demand deposits, and this data is usually published by a nation's government or central bank.

What components make up the money supply?

The money supply includes all currency and liquid instruments circulating in a national economy at a specific time.

What is the relationship between money supply and inflation?

There is a strong relationship between the growth of money supply and long-term price inflation; if the money supply rises too quickly, it typically leads to an increase in the long-term inflation rate.

What is inflation in economic terms?

Inflation refers to a general increase in prices of goods and services, resulting in a decline in the purchasing value of money.

What are the different forms of money supply mentioned in the script?

The script mentions various forms of money supply including EM0, EM1 (narrow money), EM2 (which adds short-term deposits), and EM3 (which includes longer-term deposits).

What does EM1 typically include?

EM1 typically includes coins and notes in circulation as well as other money equivalents that can be easily converted into cash.

How does an increase in money supply affect interest rates?

Interest rates generally fall when the money supply in an economy rises, stimulating spending as consumers and businesses have more cash.

What happens to employment levels when the money supply increases?

As demand for products increases due to higher money supply, businesses need to produce more, which typically boosts employment.

Are there differences in how money supply is expressed globally?

Yes, money supply is expressed differently across the world; for example, the UK uses EM4 which includes various components like UK coins, banknotes, and deposits.