What is Money Supply?
Money supply is the total amount of money circulating in an economy at any given time. Central banks measure it in tiers—M1 (physical cash and demand deposits), M2 (M1 plus savings accounts), and M3 (M2 plus money market securities)—each broader than the last.
Money supply is the total amount of money in an economy, measured in tiers: M1 (cash + checking accounts), M2 (M1 + savings), and M3 (M2 + money market assets).
Step-by-step worked examples
If M1 is $2.2 trillion and savings accounts add $19.3 trillion, what is M2?
M2 = M1 + savings deposits M2 = 2.2 + 19.3 = 21.5 trillion
Physical cash in circulation is $800 billion, checking deposits $1.4 trillion. What is M1 (approx)?
M1 = cash + checking deposits M1 = 0.8 + 1.4 = 2.2 trillion
If M2 is $21.5 trillion and money market assets are $8.3 trillion, what is M3?
M3 = M2 + money market securities M3 = 21.5 + 8.3 = 29.8 trillion
Flashcards
Quick quiz
Q1.Which of these is included in M1?
Q2.M2 includes…
Q3.Why is M1 more liquid than M2?
Q4.If a central bank increases M2, it usually means…
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Common mistakes
Money supply = total wealth in an economy. — Correct: Money supply is only the money circulating; wealth includes property, stocks, and assets.
M1 is always larger than M2. — Correct: M1 is a subset of M2. M2 is always larger because it includes M1 plus savings.
Only cash counts in money supply. — Correct: M1 includes cash AND demand deposits (checking accounts). M2 goes even broader.
Credit card limits are part of money supply. — Correct: Credit is debt, not money. Only actual money (cash, deposits) counts.
FAQ
What is money supply?
Money supply is the total amount of money in an economy—measured in tiers (M1, M2, M3) by central banks.
Why do central banks care about money supply?
It affects inflation, interest rates, and economic growth. By adjusting money supply, central banks influence the entire economy.
What is the difference between M1, M2, and M3?
M1 is cash + checking; M2 adds savings accounts; M3 adds longer-term financial assets. Each is broader than the last.
How does money supply affect prices?
More money chasing the same goods → prices rise (inflation). Less money → prices fall (deflation).