What is the money supply and how is it measured?

There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

How do you calculate the initial money supply?

In order to determine how much money can be created in the economy from an initial deposit, one must first solve for the money multiplier:

1. Money Multiplier= 1/ Reserve Ratio.
2. Total Increase in Money supply= Money Multiplier x Deposit.
3. Expansion of Money Supply= Money Multiplier x Excess Reserves.

What is the best measure of money supply?

The M3 classification is the broadest measure of an economy’s money supply. It emphasizes money as a store-of-value more so than as a medium of exchange, hence the inclusion of less-liquid assets in M3.

How do you calculate M3 money supply?

M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits).

What is money supply Class 12 macroeconomics?

In the Class 12 Macroeconomics Chapter 3 Notes, ‘supply of money’ refers to the aggregate stock of money (currency notes, coins and demand deposit of banks) in the distribution or are held by the public at a certain point of time.

Which is the concept M3 of money supply?

Broad Money
M3 (Broad Money) M3 consists of all currency notes held by the public, all demand deposits with the bank, deposits of all the banks with the RBI and the net Time Deposits of all the banks in the country. So M3 = M1 + time deposits of banks.

Is money supply a stock or flow?

A flow is any quantity that must be measured over a period of time. Income is a flow. A stock is any quantity that is measured at a single instant in time. The money supply is a stock.

What is M2 and M3 money supply?

M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.

What is the difference between M3 and M4 money supply?

M3 and M4 are known as broad money. These gradations are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply.

What increases money supply?

Every time a dollar is deposited into a bank account, a bank’s total reserves increases. The bank will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply. This is how banks “create” money and increase the money supply.

How banks Create money Macroeconomics?

Banks create money during their normal operations of accepting deposits and making loans. In this example we’ll use M1 as our definition of money. (M1 = currency in our pockets and balances in our checking accounts.) When a bank makes a loan it creates money.

What factors determine money supply?

The money supply is a function not only of the high-powered money determined by the monetary authorities, but of interest rates, income and other factors. The latter factors change the proportion of money balances that the public holds as cash.

What is the equation for money supply?

The Equation of Exchange addresses the relationship between money and price level, and between money and nominal GDP. The equation simply states: M x V = P x Y. Where M = the money supply, usually the M1. V = the velocity of money. P = the price level. Y = real output, or real GDP.

How should we define the money supply?

The money supply is all the currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. Governments issue paper currency and coin through some combination of their central banks and treasuries.

What is the measure of money supply?

Money Supply. Money Supply is the current total supply of money in circulation in the whole economy of the country. There are three measures of money supply referred to as M1, M2, and M3. M1 is a narrow measure of money’s function as a medium of exchange.