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In macroeconomics, money supply ("monetary aggregates", "money stock") is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. The rate of interest is the price of money. The two are related inversely, such that, as money supply increases interest rates will fall. When the interest rate equates the quantity of money demanded with the quantity of money supply, the economy is working at the money market equilibrium. Image File history File links Gtk-dialog-info. ...
Circulation in macroeconomics Macroeconomics is a branch of Economics that deals with the performance, structure, and behavior of the economy as a whole. ...
A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ...
This article is about a term used in economics. ...
For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable interest representing financial value. ...
Introduction The money demand market uses the same tools of analysis as to other markets: supply and demand result in an equilibrium price, where the free market (or long term) interest rate plus the quantity of real money available balances the demand for money. Short term rates are artificially manipulated by the Federal Reserve in the open market. Equilibrium price is the price at which the quantity demanded of a good or service is equal to the quantity supplied. ...
A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy...
In economics, the period of time required for economic agents to reallocate resources, and generally reestablish equilibrium. ...
An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ...
In economics, the open market is the term used to refer to the environment in which bonds are bought and sold. ...
When thinking about the "supply" of money, it is natural to think of the total of banknotes and coins in an economy. That, however, is vastly incomplete. In the United States, coins are minted by the United States Mint, part of the Department of the Treasury, outside of the Federal Reserve. Banknotes are printed by the Bureau of Engraving & Printing on behalf of the Federal Reserve System. The Federal Reserve can also create book-keeping credits in the reserve accounts of its member banks, on the same terms as it can issue paper banknotes (by pledging collateral, usually in the form of US Treasury securities). As it always stands ready to exchange these book-keeping credits for paper banknotes, they are functionally equivalent. A £20 Bank of England banknote. ...
This article does not cite any references or sources. ...
Seal of the U.S. Mint The United States Mint primarily produces circulating coinage for the United States to conduct its trade and commerce. ...
The U.S. Treasury building today. ...
The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ...
In this respect, all paper banknotes in existence are systematically linked to the expansion of the electronic, credit-based money supply. Coinage can be increased or decreased outside this system by Legal Mandate or Legislative Acts. However, at present the coin base is held in check and used as a complementary system rather than a competitive system with private bank issue of electronic, credit-based money. The common practice is to include printed and minted money supply in the same metric M0.
The more accurate starting point for the concept of money supply is the total of all electronic, credit-based deposit balances in bank (and other financial) accounts (for more precise definitions, see below) plus all the minted coins and printed paper. The M1 money supply is M0, plus the total of (non-paper or coin) deposit balances without any withdrawal restrictions (restricted accounts that you can't write checks on are put in the next level of liquidity, M2). Market liquidity is a business, economics or investment term that refers to an assets ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. ...
The relationship between the M0 and M1 money supplies is the money multiplier — basically, the ratio of cash and coin in people's wallets and bank vaults and ATMs to Total balances in their financial accounts. The gap and lag between the two (M0 and M1 - M0) occurs because of the system of fractional-reserve banking. Fractional-reserve banking refers to the common banking practice of issuing more money than the bank holds as reserves. ...
Scope Because (in principle) money is anything that can be used in settlement of a debt, there are varying measures of money supply. The narrowest (i.e., most restrictive) measures count only those forms of money available for immediate transactions, while broader measures include money held as a store of value This article does not cite any references or sources. ...
United States
 Components of US money supply (M1, M2, and M3) since 1959 The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows: Image File history File links This is a lossless scalable vector image. ...
Image File history File links This is a lossless scalable vector image. ...
As of March 23, 2006, information regarding M3 will no longer be published by the Federal Reserve, ostensibly because it costs a lot to collect the data but doesn't provide significantly useful data[1]. The other three money supply measures will continue to be provided in detail. It has been suggested that this article or section be merged with Current account (banking). ...
The passbook is the traditional document to keep track of earnings in a savings account Savings accounts are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but can not be used directly as money (by, for example, writing a cheque). ...
The money market is a general term for the markets in which banks lend to and borrow from each other, trade financial instruments such as Certificates of Deposit (CDs) or enter agreements such as Repos and Reverses. ...
A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. ...
Eurodollars are deposits denominated in United States dollar at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. ...
Repurchase agreements (RPs or Repos) are financial instruments used in the money markets and capital markets. ...
In an effort to reverse this change, Congressman Ron Paul introduced the now expired H.R.4892[2] on March 7th, 2006, and subsequently sponsored H.R.2754[3][4] on June 15th, 2007 which has been referred to the House Committee on Financial Services. Ronald Ernest Paul (born August 20, 1935) is a 10th-term United States congressman from Lake Jackson, Texas, a member of the Republican Party, a pro-life physician, and a candidate for the Republican nomination in the 2008 presidential election. ...
Meeting of the House Financial Services Committee The United States House Committee on Financial Services (or House Banking Committee) oversees the entire financial services industry, including the securities, insurance, banking, and housing industries. ...
United Kingdom There are just two official UK measures. M0 is referred to as the "wide monetary base" or "narrow money" and M4 is referred to as "broad money" or simply "the money supply". - M0: Cash outside Bank of England + Banks' operational deposits with Bank of England.
- M4: Cash outside banks (ie. in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and Certificate of Deposit. [5]
With reference to the UK economy, the M4 is a definition of the money supply denoting Broad Money, a wide definition of the volume of sterling in the economy, encompassing notes and coin as well as money held in bank accounts. ...
Link with inflation
Monetary exchange equation Money supply is important because it is linked to inflation by the "monetary exchange equation": 
 U.S. M3 money supply as a proportion of gross domestic product. where: Image File history File links No higher resolution available. ...
Image File history File links No higher resolution available. ...
- velocity = the number of times per year that money turns over in transactions for goods and services(if it is a number it is always simply nominal GDP / money supply)
- nominal GDP = real Gross Domestic Product * GDP deflator
- GDP deflator = measure of inflation. Money supply may be less than or greater than the demand of money in the economy
In other words, if the money supply grows faster than real GDP growth (described as "unproductive debt expansion"), inflation is likely to follow ("inflation is always and everywhere a monetary phenomenon"). This statement must be qualified slightly, due to changes in velocity. While the monetarists presume that velocity is relatively stable, in fact velocity exhibits variability at business-cycle frequencies, so that the velocity equation is not particularly useful as a short run tool. Moreover, in the US, velocity has grown at an average of slightly more than 1% a year between 1959 and 2005 (which is to be expected due to the increase in population, unless money supply grows very rapidly). In economics, income velocity of money is the number of times an individual unit of currency turns over (i. ...
Nominal GDP per person (capita) in 2006. ...
In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. ...
Monetarism is a set of views concerning the determination of national income and monetary economics. ...
Percentage In terms of percentage changes (to a small approximation, the percentage change in a product, say XY is equal to the sum of the percentage changes %X + %Y). So: - %P + %Y = %M + %V
That equation rearranged gives the "basic inflation identity": - %P = %M + %V - %Y
Inflation (%P) is equal to the rate of money growth (%M), plus the change in velocity (%V), minus the rate of output growth (%Y).[6]
Money supply and cash In the U.S., as of December, 2006, M1 was about $1.37 trillion and M2 was about $7.02 trillion. If you split all of the money equally per person in the United States, each person would end up with roughly $4,550 ($1,370,000M/301M) using M1 or $23,320 ($7,020,000M/301M) using M2. The amount of actual physical cash, M0, was $749.6 billion in December, 2006, almost three times the $261 billion in cash and cash equivalents on deposit at Citigroup as of the end of that year and roughly $2492 per person in the US. [7] [8] This article does not cite any references or sources. ...
Citigroup Inc. ...
Bank reserves at central bank When a central bank is "easing", it triggers an increase in money supply by purchasing government securities on the open market thus increasing available funds for private banks to loan through fractional reserve banking (the issue of new money through loans) and thus grows the money supply. When the central bank is "tightening", it slows the process of private bank issue by selling securities on the open market and pulling money (that could be loaned) out of the private banking sector. It reduces or increases the supply of short term government debt, and inversely increases or reduces the supply of lending funds and thereby the ability of private banks to issue new money through debt. A government bond is a bond issued by a national government denominated in the countrys own currency. ...
The operative notion of easy money is that the central bank creates new bank reserves (in the US known as "federal funds"), which let the banks lend out more money. These loans get spent, and the proceeds get deposited at other banks. Whatever is not required to be held as reserves is then lent out again, and through the magic of the "money multiplier", loans and bank deposits go up by many times the initial injection of reserves. Bank reserves are banks holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the later case called federal funds), plus currency that is physically held in banks vaults (vault cash). ...
Federal Funds transactions redistribute bank reserves. ...
However in the 1970s the reserve requirements on deposits started to fall with the emergence of money market funds, which require no reserves. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurodollar deposit. At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. The vast majority of funding sources used by Private Banks to create loans have nothing to do with bank reserves and in effect create what is known as "moral hazard" and speculative bubble economies. Money funds (or money market funds, money market mutual funds) are mutual funds that invest in short-term debt instruments. ...
The examples and perspective in this article or section may not represent a worldwide view. ...
A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. ...
Eurodollars are deposits denominated in United States dollar at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. ...
Transactions deposit is a term used by the Federal Reserve for checkable deposits and other accounts that can be used directly as cash without withdrawal limits or restrictions. ...
Includes demand deposits, ATS, NOW, and other checkable deposits. ...
These days, commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue commercial paper. Consumer loans are also made using savings deposits which are not subject to reserve requirements. These loans can be bunched into securities and sold to somebody else, taking them off of the bank's books. A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. ...
This article is about short-term financing. ...
Commercial paper is a money market security issued by large banks and corporations. ...
The examples and perspective in this article or section may not represent a worldwide view. ...
The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have declined.
In recent years, the irrelevance of open market operations has also been argued by academic economists renown for their work on the implications of rational expectations, including Robert Lucas, Jr., Thomas Sargent, Neil Wallace, Finn E. Kydland, Edward C. Prescott and Scott Freeman. Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Robert E. Lucas Jr. ...
Robert Emerson Lucas, Jr. ...
Thomas J. Sargent (born July 19th, 1943) is an economist. ...
Finn E. Kydland (born 1943) is a Norwegian economist. ...
Edward C. Prescott (born 26 December 1940) is an American economist. ...
Scott John Freeman (June 9, 1954 – July 23, 2004) was an American economist. ...
Arguments Assuming that prices do not instantly adjust to equate supply and demand, one of the principal jobs of central banks is to ensure that aggregate (or overall) demand matches the potential supply of an economy. Central banks can do this because overall demand can be controlled by the money supply. By putting more money into circulation, the central bank can stimulate demand. By taking money out of circulation, the central bank can reduce demand.
For instance, if there is an overall shortfall of demand relative to supply (that is, a given economy can potentially produce more goods than consumers wish to buy) then some resources in the economy will be unemployed (i.e., there will be a recession). In this case the central bank can stimulate demand by increasing the money supply. In theory the extra demand will then lead to job creation for the unemployed resources (people, machines, land), leading back to full employment (more precisely, back to the natural rate of unemployment, which is basically determined by the amount of government regulation and is different in different countries).
However, central banks have a difficult balancing act because, if they print too much money, demand will outstrip an economy's ability to supply so that, even when all resources are employed, demand still cannot be satisfied. In this case, unemployment will fall back to the natural rate and there will then be competition for the last remaining labour, leading to wage rises and inflation. This can then lead to another recession as the central bank takes money out of circulation (raising interest rates in the process) to try and damp down demand.
The main debate amongst economists in the second half of the twentieth century concerned the central banks ability to know how much money to inject into or take out of circulation under different circumstances. Some economists like Milton Friedman believed that the central bank would always get it wrong, leading to wider swings in the economy than if it were just left alone. That is why they advocated a non-interventionist approach.
Current Chairman of the U.S. Federal Reserve, Ben Bernanke, has suggested that over the last 10 to 15 years, many modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon he terms "The Great Moderation" [9]. Ben Shalom Bernanke[1] (born December 13, 1953) (pronounced ber-NAN-kee, bər-nan-kē or ), is an American economist and current Chairman of the Board of Governors of the United States Federal Reserve. ...
Central banks operating under a fixed/pegged exchange rate system cannot use the money supply to stimulate demand since the effects on the interest rate would affect the exchange rate. Such central banks generally use inflation targeting, trying to keep a steady and low inflation and hence exchange rate, leaving policy directly affecting the goods and labor market to the government.
Recent Money Supply changes
Australia Percent change at annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 16.35 -- 16.0 [Source for M1] [Source for M3]
Canada Percent change at annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 9.91 7.44 10.07 [Source]
China Percent change at annual rates M1 M2 M3 12 Months from March 2006 TO March 2007 19.98 17.3 -- [Source]
Eurozone Percent change at seasonally adjusted annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 6.1 -- 10.9 [Source]
Japan Percent change at seasonally adjusted annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 -0.2 1.8 3.6 [Source]
Russia Percent change at seasonally adjusted annual rates M1 M2 M3 12 Months from May 2006 TO May 2007 -- 59.9 -- [Source]
Switzerland Percent change at seasonally adjusted annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 -4.3 -6.4 2.4 [Source]
UK Percent change at seasonally adjusted annual rates M1 M2 M3 12 Months from June 2006 TO June 2007 11.95 15.56 15.60 [Source]
USA Percent change at seasonally adjusted annual rates M1 M2 M3 3 Months from Mar. 2007 TO June 2007 -0.9 5.2 -- 6 Months from Dec. 2006 TO June 2007 0.1 6.3 -- 12 Months from June 2006 TO June 2007 -0.7 6.1 12.0 [Source for M1 and M2] [Source for M3]
See also Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. ...
A measure of inflation that excludes certain items which face volatile price movements. ...
Debt is used to finance and pay for undertakings and business around the world. ...
A debt-based monetary system is an economic system where money is created primarily through fractional reserve banking techniques, using the private banking system. ...
Face-to-face trading interactions on the New York Stock Exchange trading floor. ...
The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933. ...
In brief, financial capital is money used by entreprenuers and businesses to buy what they need to make their products (or provide their services). ...
In economics, Float makes up the smallest part of the money supply. ...
Fractional-reserve banking refers to the common banking practice of issuing more money than the bank holds as reserves. ...
Full-reserve banking is a theoretically conceivable banking practice in which all currency circulating in a financial system would be backed up by an asset that is generally considered to be a stable store of value, such as gold. ...
With reference to the UK economy, the M4 is a definition of the money supply denoting Broad Money, a wide definition of the volume of sterling in the economy, encompassing notes and coin as well as money held in bank accounts. ...
Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ...
Monetarism is a set of views concerning the determination of national income and monetary economics. ...
This article is about short-term financing. ...
Money zero maturity is money supply cash and bank deposits that dont have a maturity. Id est dont have any withdrawal restrictions, which is a money supply less time deposits. ...
Seigniorage, also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. ...
The government determines the value of the index of leading economic indicators from the values of ten key variables. ...
Notes and references - ^ Discontinuance of M3
- ^ H.R.4892 at thomas.loc.gov
- ^ H.R.2754 at thomas.loc.gov
- ^ H.R. 2754 at govtrack.us
- ^ www.bankofengland.co.uk Explanatory Notes - M4 retrieved August 13 2007
- ^ "Breaking Monetary Policy into Pieces", May 24 2004, http://www.hussmanfunds.com/wmc/wmc040524.htm
- ^ http://www.federalreserve.gov/releases/h6/current/
- ^ http://www.citigroup.com/citigroup/fin/data/k04c_restated.pdf
- ^ http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htm
is the 225th day of the year (226th in leap years) in the Gregorian calendar. ...
External links
Data The Peoples Bank of China (PBC) (Simplified Chinese: ä¸å›½äººæ°‘银行; Traditional Chinese: ä¸åœ‹äººæ°‘銀行; pinyin: ZhÅngguó RénmÃn YÃnháng ) (not to be confused with the Bank of China or the Central Bank of China) is the central bank of the Peoples Republic of China with the power to...
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