COMPONENTS OF MONEY SUPPLY
CORINE E. PABON
March 5, 2013
What is the meaning of money supply? To half of the human population money supply is government assistance i.e. unemployment checks, disability checks, food stamps, etc. Some people feel it is utilize to pay for wars and mass destructions. To others it’s just translated into their household and how the next bill is going to be paid. On a contrary, although these circumstances play a role, the meaning of money supply is a little more complex. Money supply basically means “money stocked” it is the total amount of monetary assets available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits. These currencies are held by the public or in accounts in banks. There are many components of money supply, but the primary components are M0, M1 and M2. These primary components are considered to be the base of the money supply. Some other components that take an account are M3 or M4 for the economies with less liquid assets. Below shows a chart of M1, M2, M3
The graph above shows year-to-year growth as a measure of the changing money supply. The numbers at the bottom of graph represent the years and the numbers left shows annual change. According to John Williams “a downward slope in this growth curve does not necessarily mean that the money supply is dropping. Only if the curve goes below zero does that show money supply having contracted over a full twelve months”.
Let’s get into detail about the primary components of money supply. M0 represents central bank’s monetary liabilities; this is generally referred to as the reserve money. Here is a chart of the M0 money supply as recently reported:
As you can see, the amount of capital held on hand in the US central bank fell from more than $2.7 trillion in the summer of 2011 to less than $2.6 billion today. While that seems like a small...
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