The
definition of money supply can be given in many ways. Money supply can be defined as the amount of money available within a particular economy to purchase goods or services.
According to macroeconomic theory,
money supply can be defined as the amount of money and currency available with common people within a particular economy for buying goods, securities, and other services. Here the cost of money is the interest rate. In this theory, money supply is also referred as money stock or monetary aggregates.
The relationship between the rate of interest and money is opposite or reverse. For example, if the money supply goes up, the interest rates go down. At the time when the amount of money in demand is equaled to the amount of money in supply by the rate of interest, then the situation of the economy is known as the money market equilibrium.
In the United States,
types of money supply is categorized into M0 Money Supply, M1 Money Supply, M2 Money Supply, and M3 Money Supply.
The categories are set in an 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 Money Supply Definition:
It is defined as the total amount of physical currencies along with central bank accounts, which can be converted into physical currency.
M1 Money Supply Definition:
It is 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 termed as demand accounts.
M2 Money Supply Definition:
It is defined as M1+ the majority of savings accounts, time deposits with small denominations (including CDs less than $100,000), and money market accounts.
M3 Money Supply Definition:
It is defined as M2+ every other types of certificates of deposit (CDs), repurchase agreements, and eurodollar deposits.