Money Supply, Inflation, & Stock Market
What is meant by the money supply? The term itself implies that a certain amount of money exists at any given time, even though the quantity may be unknown. In truth there can be no meaningful measure of the quantity because it is continually varying as a function of demand. The money supply, or money stock, refers to the total amount of money held by the nonbank public at a point in time in an economy. There are several ways to measure such an amount (called a monetary aggregate), but each includes currency in circulation plus demand deposits (checking-account money). Because money is anything that can be used in settlement of a debt, there are varying measures of money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on that type of money. Narrow money is the type of money that is more easily affected by monetary policy whereas broad money is more difficult to affect through monetary policy. Narrow money exists in smaller quantities while broad money exists in much larger quantities. Each type of money can be classified by placing it along a spectrum between narrow (easily affected) and broad (difficult to affect) money. The different types of money are typically classified as M's. The number of M's usually range from M0 (most narrow) to M3 (broadest) but which M's are actually used depends on the system. The typical layout for each of the M's is as follows: •
M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. This measure is known as narrow money because it is the smallest measure of the...
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