The quantity of money, also known as the money supply, is measured by economists and central banks using various methods and definitions. The most common measures include:
1. M1 Money Supply:
- Definition: This is the narrowest definition of money supply and includes the most liquid forms of money, readily available for spending.
- Components:
- Currency in circulation: Physical cash held by the public.
- Demand deposits: Checking accounts held by individuals and businesses.
- Traveler's checks: Checks used by travelers for transactions.
2. M2 Money Supply:
- Definition: This measure includes M1 plus less liquid assets that are easily convertible into cash.
- Components:
- M1: All components of M1.
- Savings deposits: Accounts that earn interest but allow limited check-writing privileges.
- Time deposits: Accounts with fixed terms and interest rates, typically less liquid than savings deposits.
- Money market mutual funds: Funds that invest in short-term debt securities.
3. M3 Money Supply:
- Definition: This is the broadest measure of money supply, including M2 plus even less liquid assets.
- Components:
- M2: All components of M2.
- Large time deposits: Time deposits with balances exceeding a certain threshold.
- Repurchase agreements (repos): Short-term loans backed by securities.
- Eurodollars: US dollar deposits held in banks outside the US.
Practical Insights:
- The specific components and definitions of money supply measures can vary across countries.
- Central banks often monitor these measures to assess economic activity and make policy decisions.
- The quantity of money in circulation is a key factor influencing inflation, interest rates, and economic growth.
Conclusion:
Measuring the quantity of money is essential for understanding the economy's health and performance. By tracking different money supply measures, economists and policymakers can gain insights into the flow of money, the level of liquidity in the economy, and the potential for inflation or deflation.
