Money supply in the economy

Money supply in the economy: This is simply the amount of money circulating in an economy. Several methods have been put across to measure money supply in an economy. However, the measures differ from nation to nation, in time and the intention. According to Dwivedi, “(i) money supply is a stock variable and measure of money supply refers to the stock of money at of point in time; (ii) by measure of money supply is meant the measure of stock of money available to the public as a means of payments and store of value and (iii) the term ‘public’ means all economic units including household, firms and institution” (212) excluding some areas like commercial and main central banks where money is in circulation. To quantify money, various policy makers and economists use M₀, M₁, M₂ and M₃ methods. “M₁includes money in circulation, checkable deposits and traveler’s checks while M₂ adds savings deposits, time deposits held in depository information and money market mutual funds share on top of M₁”( Gwartney, Stroup, Sobel, and Macpherson 266). M₀ is the monetary base from which other measures build on while M₃ is a broader measure including items that would be termed to be close substitutes for money.

 Money value is affected by its supply in the market; when its supply is limited comparing with its demand, its value is high at the time, but when unlimited in circulation, it looses its value; that is, one uses a lot of it to buy few items. Money supply is a very central issue in any nation; in most countries, it is handled by the government through central banks and treasury, other involved groups are credit unions and depository institutions among others with regard to a nation. Money supply in an economy will always affect interest rates; with increase in supply, the GDP increases too in the short run while price level in the long run, otherwise they both decrease in the same manner respectively. Money supply is important to GDP calculation and its increase bids bond prices up as it slows down the interest rate to affect investments which in turn influences total output in an economy. Suppose money supply generates faster than real output, inflation tends to occurs; hence, as much as developing economies need a growing money supply to pay for the increase in aggregate output, they need to be careful to avoid entering into such a situation. Referring to Beenhakker, money supply is expressed as MV=PQ; where M, V, P and Q means money supply, money velocity, price level and real output level respectively(103).

Beenhakker, Henri L. The Global Economy and International Financing. Westport: Greenwood Publishing Group, 2001. Print.

 Gwartney, J.D., Stroup, R. L., Sobel, R. S., and David A. Macpherson. Economics: Private and Public Choices. Mason: South-Western Cengage Learning, 2009. Print.