Money Supply

Money supply is measured using different definitions, depending on which types of money are included. Narrow measures include physical cash and deposits that can be spent immediately, such as current accounts. Broader measures also include savings deposits, time deposits and other assets that can be converted into spending money relatively easily. These measures are often labelled M0, M1, M2 and M3, although the exact definitions vary between countries.

Most money in modern economies is not physical cash but bank deposits. When banks make loans, they create new deposits, which adds to the money supply.

The money supply influences the economy. Rapid growth in the money supply, if it outpaces the growth in goods and services, can lead to inflation. A shrinking money supply can contribute to falling spending and deflation.

Central banks influence the money supply through interest rates, reserve requirements, open market operations and quantitative easing or tightening. Most central banks today focus on interest rates rather than targeting money supply directly, but they still monitor it as an indicator.