Posts Tagged ‘indicator’

Money supply is basically the total amount of currency circulating in an economy at a specific time. It involves issued paper money, coins, and other liquid instruments such as funds on checking and savings accounts in the bank.

The value of Money supply is an important macroeconomic indicator because it may impact the economy through price level of goods and services, inflation, and the business cycle. The government or the central bank releases the information annually.

Analyst from both public and private sector carefully monitors it because of its possible effect on the economy. It is controlled through policies, born from careful analysis of economists, regarding interest rates and increase or decrease of the volume of money currently circulating the economy.

The increase of supply most probably lowers the interest rates thus attracting investments, generating jobs in the process, that would most probably land on the hands of the consumers. The more money in the hands of a consumer, the greater the urge to spend. Businesses would then react to this by increasing the rate of production which would walk hand-in-hand with the increase in the demand of labor.

The types of money and its value on the Money supply are categorized in “M”s:

M0 – is the total cash resource circulating the country.

M1 – All the tangible money, such as coins and currency, and the most liquid resources such as demand deposit and traveler’s cheques. M0 + checkable deposits.

M2 – The combination of the previous type and all time-related deposits; savings deposits, and non-institutional money-market funds. M1 + time deposits ( less than $100,000) and other highly liquid savings.

M3 – The broadest measurement of the money. It includes M2 plus time deposits exceeding $100,000, institutional money-market funds, short-terms repurchase agreements, and other larger liquid assets. M2 + large time deposits and deposits above $100,000.

M4 – the sum of all the preceding types.

The degree of importance of these indicators vary from country to country. There are countries like the United States that pay more attention to M2 while M3 outweighs the other types in most European countries. The Great Britain gives more significance to M4.

Stephen Stevenson