The broader definition M 2 adds money market funds, savings deposits and small- denomination time deposits to M 1.In order to understand money supply, we have to note the interaction between currency and demand deposits and see how the central bank’s monetary policy influences these two components of money supply. Real money supply is the nominal money supply adjusted for the effects of inflation. Monetary value in real terms is intended to allow money to be used as a fixed purchasing unit (standardized, with inflation removed) over periods of time. We can then observe whether purchasing power is. Jan 11, 2021 Money is distinct from other forms of wealth that first need to be liquidated—that is, converted into money—before their value can be spent. According to this definition, physical currency and checkable bank deposits constitute money. And, indeed, these objects make up the definition of what economists label as the M1 money supply.

Read this article to learn about the supply of money in an economy and its components.

The stock of money measured in terms of goods, not dollars. The stock of high powered money only. The real value of currency in circulation only. The actual quantity of money, rather than the officially reported quantity. The ratio of the real GDP to the nominal money supply.
What is the Money Supply? The money supply is the stock of money in the economy. It is determined by the uses to which certain physical and financial assets are put. For example, in many cultures in the past, shells have been used as money.

Supply of Money:

Money supply means the total amount of money in an economy. The effective money supply consists mostly of currency and demand deposits.

Currency includes all coins and paper money issued by the government and the banks. Bank deposits (payable on demand) are regarded part of money supply and they constitute about 75 to 80 per cent of the total money supply in the US. Some economists also include near money, or such liquid assets as savings, deposits and government bills in the money supply. The total supply of money is determined by banks, the Federal Reserve, businessmen, the government and consumers.

Supply Of Money Definition

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For theoretical purposes money is defined as any asset which performs the functions of money—but in actual practice, there are many financial assets which perform these functions to a greater or lesser degree and this makes it difficult to measure empirically the magnitude of money. It should be noted that ‘money supply’ which refers to the total stock of domestic means of payment owned by the ‘public’ in a country, we consider the stock of money in spendable form only to be the main source of money supply.

In other words, the cash balances held by the central and state governments with the Central Bank and in treasuries are generally excluded on the ground that they arise out of the non-commercial, particularly administrative operations of the government. Thus, the ‘quantity of money’ means the ‘total amount of money in circulation’ in existence at a time.

Money is something which is measurable. Supply of money refers to its stock at any point of time, it is because money is a stock variable as against a flow variable (real income). It is the change in the stock of money during a period (say a year), which is a flow. The stock of money always refers to the stock of money held by the public. Throughout history the question of not only what constitutes money but where it comes from has been both important and controversial.

In contrast to income, which is measured over time; the money is a stock, not a flow. Since money is a stock, it means that the amount of money in existence at any point of time must be held by some entity in the economy. Economists make a distinction between amount of money in existence at any point of time and the amount that people and institutions may want to hold for various reasons. When the amount of money actually being held coincides with the amount of money individuals, business houses and governments actually want to hold; a condition of monetary equilibrium exists.

A distinction must be made between the current deposits or current accounts of banks which have the status of money and deposit accounts (fixed or savings deposits) which do not have the status of money and are at best regarded quasi-money or near money. The reason being that time deposits of commercial banks can be drawn only at the end of a fixed period or earlier by paying a penalty or by obtaining prior permission. These are no doubt a store of value but are not the means of payment but only equivalent to means of payment.

These are no doubt liquid assets but they are not so liquid enough as to rank as money. What distinguishes these deposits is the fact that they earn an interest income and can be converted as means of payment only after some delay and not at once. As such, these time and saving deposits are excluded from the pool of the money supply.

However, alternative definitions of money have been adopted by many writers. Notably, the Chicago School led by Milton Friedman opts to include all bank deposits, time and demand, in money supply. In fact, Schwartz and Friedman are willing to consider as money all marketable government securities which are supported at par. By the same logic, there is no reason why the liabilities of saving institutions should not also be included in money.

The debatable question is whether the measure of money should be extended to include other deposits liabilities of the commercial banks, e.g., time deposits in USA and deposit accounts in the UK. Some investigators go further and include the liabilities of some other deposit taking institutions, such as savings and loan associations in the USA and saving banks in Britain, on the grounds that their fixed monetary value—and usually the ease of encashment—makes them good substitutes for interest bearing bank deposits.

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It has, therefore, to be observed that various measures of money supply keep on changing from country to country and from time to time within the country. As such, the measurement of money supply becomes an empirical matter. Up to 1968, the RBI published a single measure of money supply (called M and later on M₁) defined as currency and demand deposits (dd), held by the public. It was called the narrow measure of money supply. After 1968 the RBI started publishing a ‘broader’ measure of money supply called aggregate monetary resources (AMR) defined as M or M₁ plus the net time deposits of banks held by the public (M₃).

However, since 1977 RBI is publishing data on four alternative measures of money supply denoted by M₁, M₂, M₃and M₄ as follows:

M or M₁ = c + dd + od

M₂= M₁ + Savings deposits with post office saving banks

(AMR) M₃ = M₁ + net time deposits of banks

M₄ = M₃ + total deposits with post office saving banks.

where c stands for currency held by public; dd, net demand deposits of banks; od implies other deposits of the RBI. Currency includes paper currency and coins, that is notes issued by the RBI and one rupee and other small coins issued by the Government of India.

Net demand deposits include deposits held by public and not inter-bank deposits—deposits held by one bank for another. These are not held by public hence excluded. Other deposits (od) of the RBI are its deposits other than those held by the government (Central and State Governments), banks, and a few others. These other deposits constitute very small proportion (less than one per cent) of the total money supply, hence could be ignored.

Each definition of money supply from M₁ to M₄ has its adherents; but by and large most economists prefer the most common sense and most acceptable definition of money or money supply, that is, M₁—because it includes everything that is generally acceptable as a means of payment but no more. Once you go beyond currency and demand deposits, it is hard to find a logical place to stop, since many things (bonds, stocks, debt instruments) contain liquidity in varying degree. It is better, therefore, to stick to M₁ definition of money supply including currency plus all demand deposits.

Real supply of money definition geography

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High powered money and measurement of money supply:

It should be noted that money supply is not always policy determined. In fact, mo

Real Supply Of Money Definition