Money Supply Definition
According to this definition, the cost of money is the interest rate. In this theory, money supply is also referred as money stock or monetary aggregates.
Money and interest rates have an inverse relationship. If the money supply goes up, interest rates go down. When the supply and demand of money are equal, by the rate of interest, the economic situation is known as money market equilibrium.
In the United States, types of money supply are categorized as: M0 Money Supply, M1 Money Supply, M2 Money Supply, and M3 Money Supply. These categories are set in ascending order (M0 to M1 to M2 to M3), and they increase in size accordingly. The M0 money supply is defined as the narrowest form of money supply.
The Federal Reserve of the United States defines the different categories of money supply in the following manner:
- M0: The total amount of physical currencies plus central bank accounts that can be converted into physical currency.
- M1: Defined as M0 minus the components of M0 which are held as vault cash or reserves, plus the amount deposited in checking or current accounts also referred to as demand accounts.
- M2: M1 plus the majority of savings accounts, time deposits with small denominations (including CD's less than $100,000), and money market accounts.
- M3: M2 plus all other types of certificates of deposit (CD's), repurchase agreements, and euro or dollar deposits.