Question

State the meaning and components of money supply.

Answer 1

Read this article to learn about the supply of money in an economy and its components.

Supply of Money:

Money supply means the total amount of money in an economy. The effective money supply consists mostly of currency and demand deposits.

Currency includes all coins and paper money issued by the government and the banks. Bank deposits (payable on demand) are regarded part of money supply and they constitute about 75 to 80 per cent of the total money supply in the US. Some economists also include near money, or such liquid assets as savings, deposits and government bills in the money supply. The total supply of money is determined by banks, the Federal Reserve, businessmen, the government and consumers.



For theoretical purposes money is defined as any asset which performs the functions of money—but in actual practice, there are many financial assets which perform these functions to a greater or lesser degree and this makes it difficult to measure empirically the magnitude of money. It should be noted that ‘money supply’ which refers to the total stock of domestic means of payment owned by the ‘public’ in a country, we consider the stock of money in spendable form only to be the main source of money supply.

In other words, the cash balances held by the central and state governments with the Central Bank and in treasuries are generally excluded on the ground that they arise out of the non-commercial, particularly administrative operations of the government. Thus, the ‘quantity of money’ means the ‘total amount of money in circulation’ in existence at a time.

Money is something which is measurable. Supply of money refers to its stock at any point of time, it is because money is a stock variable as against a flow variable (real income). It is the change in the stock of money during a period (say a year), which is a flow. The stock of money always refers to the stock of money held by the public. Throughout history the question of not only what constitutes money but where it comes from has been both important and controversial.

In contrast to income, which is measured over time; the money is a stock, not a flow. Since money is a stock, it means that the amount of money in existence at any point of time must be held by some entity in the economy. Economists make a distinction between amount of money in existence at any point of time and the amount that people and institutions may want to hold for various reasons. When the amount of money actually being held coincides with the amount of money individuals, business houses and governments actually want to hold; a condition of monetary equilibrium exists