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Broader measures include money held as a store of value. Different measures of money have different technical definitions. The most common measures are named M0, M1, M2, and M3 (from narrow to broadly defined). In the United States, these are defined as follows:
Money supply is important because it is directly linked to inflation by the " monetary exchange equation ":
velocity * money supply = real GDP * GDP deflatorwhere:
Or PY = MV. P (the price level) times Y (real output) equal M (money stock) times V ("velocity"). ([1])
In other words, if the money supply grows faster than real GDP, inflation must follow as velocity has been shown to be relatively stable.
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).
As of about the year 2000This page is about the year 2000. See 2000 AD for the UK comic book, Number 2000 for other uses. 2000 is a leap year starting on Saturday (see link for calendar), and also the International Year for a Culture of Peace''. Events Y2K passes without the seri, the M1 money supply was about 1.3 trillionThe numeral trillion refers to one of two number values, depending on the context of where and how it is being used. It is the largest numerical value in everyday non-scientific use in the English language. Usage Short scale usage In Brazil, Russia, Turke dollars, the M2 was $5.4 trillion, and the M3 was $7.8 trillion. If you split all of the money equally per person in the United States, each person would end up with about 26,000.
The amount of actual physical cash was about half a trillion as of the year 2000. To put this in perspective, if everyone who had liabilities at the largest US bank CitigroupCitigroup ( NYSE:) is the largest financial services conglomerate in the world. During the past 3 years it has been by most measures the largest company in the world, with the largest profits and the most assets. Its planned formation was announced on Apr tried to liquidate all of their assets from there, there would not be enough cash. ([2])
The supply of money can only increase if the money is first "printed" by the issuer of money, usually the government central bankAlthough officially state owned in most countries, the central bank is usually an autonomous entity responsible for the stability of the national currency see also money and the national financial system as a whole. Furthermore it designs and implements m. The central bankAlthough officially state owned in most countries, the central bank is usually an autonomous entity responsible for the stability of the national currency see also money and the national financial system as a whole. Furthermore it designs and implements m "prints" coins and bills and electronic money.
The "printing" is usually done with the central bank buying government debtGovernment debt (sovereign debt) is debt owed by the government of a sovereign country either to residents or non-residents. Sovereign debt problems have been a major public policy issue since World War II, including the treatment of debt related to that. The government debt can be bought directly from the government or from public holdings (primarily banks). In the United States the decision on how much government debt the Federal Reserve should buy is decided by the Federal Open Market Committee ( FOMC).
The big chunk of the money supply, M1, M2, and M3, are types of deposit accounts. The first balance sheet item in a bank is usually deposits. If $1 end up as a deposit in a bank (bank liability), depending on what " reserve requirements" that deposit has, the whole sum or almost the whole sum can immediately be lent out. If the deposit has no reserve requirement the whole dollar can be lent out, and the borrower can buy an asset, and the seller of the asset can place the proceeds in another money supply constituent deposit. And the money supply is now $2 or close to $2. That money can then in theory continue to increase many times over.
The Federal Reserve decides the level of "reserves of depository institutions".
Monetary policy has significant effects on employment and output in the short run, but in the long run, it affects primarily prices.| Politics | Business | Finance |
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