Money Supply

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Money supply is the total amount of money in circulation in the economy at a particular time. It is considered an important instrument in controlling inflation.

There are three measures for money supply, namely M1, M2, and M3. M1 is a narrow measure of money’s function as a medium of exchange and consists of notes and coins in circulation, travelers’ checks, and other checkable deposits.

M2 is a broader measure that reflects money’s function as a store of value. It comprises M1 plus savings and time deposits.

Lastly, M3 covers items that are considered close substitutes to money. This is M2 plus larger time deposits, institutional money-market funds, short-term repurchase agreements, and other larger liquid assets.

Note: As of March 23, 2006, the Fed no longer publishes the M3 measure of money supply. According to the Fed, the M3 doesn’t convey any information about economic activity that is not already included in M2 and that the costs of measuring it outweigh the benefits. For them, this measure of the “big money” has not played a role in the monetary policy process for many years. However, an M3 estimate is still provided by the Shadow Government Statistics website.

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