Money supply is the total amount of money a particular country has on a particular day.
Of course, that amount can change dramatically from day to day and year to year depending on a number of factors.
In economics, money supplies includes physical cash money, or anything that can be very easily converted to cash money such as deposits in a bank account.
Each country has a different definition of the categories of their own money supply, which are usually classified as M0, M1, M3 or M4. A country may use many categories or only a few categories to describe varying levels of liquidity of money in their economy.
Here, we’ll take a closer look at what exactly is included in the money supply, as well as the different classifications of money supply according to the U.S. Federal Reserve definitions.
These classifications identify how liquid a particular money supply is. In other words, the classifications of money stock are connected to how quickly the money can be used as cash.
The Monetary Base
The Monetary Base is the total money in circulation plus reserves. Reserves are the money that banks have in accounts with the Federal Reserve. The Monetary Base in other countries may be called the M0 Money Supply.
What is Included in M1 Money Supply?
The M1 Money Supply, as classified in the U.S., is a very accessible, or liquid, type of money supply.
The M1 Money Supply includes very liquid money such as cash bills and coins. M1 Money Stock money in circulation that you commonly use to pay for things in cash. M1 Money Supply also includes money in deposited money in accounts at banks, savings and loan associations and credit unions as well.
If you want to know what the current M1 Money Supply is, the best way to get the most accurate and current information is to turn to the U.S. Federal Reserve data.
The Federal Reserve information on money stock is scheduled for release on the fourth Tuesday of every month, generally around 1 p.m. EST.
The M1 Money Supply is Increasing in the U.S.
The M1 money supply in the U.S. is increasing recently because the federal government has held interest rates low. The government wants to keep interest rates low so people have better access to funds from bank loans so they can continue to make purchases, including major purchases, that keep the economy growing.
Interest rates remained low during the COVID-19 pandemic because the pandemic put such a strain on the economy. Businesses were forced to close, and many people lost their jobs as others began working remotely. Several industries – including traditional retail, hotel and restaurant, and entertainment business that depended on large crowds took a hit.
Other regulations that could affect the money supply include requirements that banks hold a certain amount of cash reserves to lower the chance they will fail during difficult times. Banks may be required to extend credit, which can also affect the money supply.
What is the M2 Money Supply?
The M2 Money Supply includes all the money in the M1 Money Supply as well as a few other types of money that the M1 Money Supply does not include.
The M2 Money Supply includes time deposits of less than $100,000, shares of retail money market mutual funds.
What Affects the Money Supply?
Many things can affect the money supply.
Some people wonder who controls the money supply. But the money supply is affected by several factors. That may include a monetary policy that involves decreasing the money supply or monetary policy involves increasing the money supply.
For example, if a government wants to establish monetary policy to increase the money supply, it can follow a policy of buying bonds.
Why is Knowing the Money Supply Important?
The money supply is one piece of the complex picture of an economy. Economists and policy makers want to have a good understanding of the money supply and the forces that control it so they can create good monetary policy.
The Money Supply data can provide some information on how the economy will perform in the short-term.
The money supply has been linked to inflation trends as well as the Gross Domestic Product (GDP).
In recent years, the connection between the money supply and the increasing price of goods is not as clear. However, the money supply figures can still help policymakers draft strategies to keep an economy from sliding into a recession or a depression.