What is Money Supply?

Money supply literally represents the populations spending power which is made out totally from any liquid form of assets in the economy. These liquid forms of assets can be exchanged for goods and services. If there is a change in the money supply, for example there’s and increased money supply that leads to inflation, this also provides increased employment rate and the manufacturing capacity is working on a bigger scale. Now if the contrary happens, there’s a decrease or shortage in the supply then we’re talking about deflation then there’s a lower employment rate and the manufacturing capacity is working less efficiently. There’s usually a financial organization which manages the money supply. This organization buys up government securities to increase the money supply and sells these securities if he wants to decrease the money supply. Also it can determine how much money are banks allowed to borrow and what is the minimal interest rate which they can charge for future borrowers. And this type of fluctuation is forwarded to the consumers and investors. The money supply is usually grouped in to for major categories. The first one is M0 this group contains all the currency and coins in circulation and bank’s reserves. The second group is M1 is made out of M0 plus money market accounts and small deposits. M2 contains M1 and additionally large deposits. M3 contains M2 and it’s also made out of savings bonds, treasury bills and commercial paper.