money supply

Definition

Population's spending power represented by the quantity of liquid assets (usually cash) in an economy that can be exchanged for goods and services. Increase in money supply (relative to the output of goods and services) leads to inflation, higher employment, and high utilization of the manufacturing capacity. Its decrease leads to deflation, unemployment, and idle manufacturing capacity. Also called money stock, it can have different meanings depending on the degree of liquidity chosen to define an asset as money. Measures of money supply (called monetary aggregates) have different criteria in different countries, and are categorized from the narrowest to the broadest. They include M0: sum of currency in circulation (notes and coins) plus banks' reserves with the central bank. M1: currency in circulation plus current (checking) accounts plus deposit accounts transferable by checks. M2: currency in circulation plus savings accounts and non-interest bearing bank deposits. M3: M1 plus all private-sector (non-government) deposits and certificates of deposit; M3C: M3 plus foreign-exchange deposits with banks. M4: M1 plus private-sector bank deposits and money market investments. M5: M4 plus building-society deposits.