Money Supply
Definition
Money supply refers to all physical currency (coins and paper bills) circulating in an economy along with demand deposits held by individuals and businesses in commercial banks.
Analogy
Picture money supply as a flowing river. Just like a river carries water, money supply flows through the economy, enabling transactions and economic activity to take place.
Related terms
M1: A narrow measure of the money supply that includes physical currency (coins and paper bills) and demand deposits.
M2: A broader measure of the money supply that includes M1 plus savings deposits, time deposits, and certain other liquid assets.
Fractional Reserve Banking: The banking system practice where banks keep only a fraction of their total deposits as reserves while lending out the rest.
"Money Supply" appears in:
Study guides (5)
AP Macroeconomics - 4.1 Financial Assets 💰
AP Macroeconomics - 4.3 Definition, Measurement, and Functions of Money
AP Macroeconomics - 5.1 Fiscal and Monetary Policy Actions in the Short-Run
AP Macroeconomics - 6.3 Foreign Exchange Market
AP Macroeconomics - 6.4 Effect of Changes in Policies & Economic Conditions on the Foreign Exchange Market
Additional resources (1)
Practice Questions (14)
- Which of the following would lead to an increase in the money supply?
- When a bank makes a loan, what happens to the money supply?
- What happens to the money supply when the Federal Reserve buys government bonds?
- When the Federal Reserve decreases the reserve requirement, what's the effect on the money supply?
- What's the effect of a decrease in the discount rate on the money supply?
- What's the effect of the Federal Reserve's policy of quantitative easing on the money supply?
- What's the effect of a decrease in the federal funds rate on the money supply?
- What is the likely short-term effect of expansionary monetary policy on the interest rate and the money supply?
- How does an increase in the money supply typically affect the rate of inflation in the long run?
- What happens to the velocity of money if the money supply doubles and the GDP stays the same?
- What is the relationship between the money supply and nominal GDP in the equation of exchange (MV = PQ)?
- What is the result of a decrease in the money supply on the price level in the long run, assuming the velocity of money and real GDP remain constant?
- If the velocity of money increases while the money supply remains constant, what is likely to happen to the nominal GDP, assuming that the price level remains constant?
- How does an increase in the money supply affect the exchange rate?
Resources
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.