Measures of Money Supply

Measures of Money Supply-What are Money Supply Measures-What are the Main Measures of a Money Supply

The US Federal Reserve Bank keeps track of the total amount of money in circulation in a number of different ways (the “Fed”). M1 doesn’t count any assets other than cash. Larger numbers after “M” mean that the measure of money includes fewer liquid assets. Unless stated otherwise, we will use M1 to refer to the money supply, which includes the following models: M1 through M3. We will go over the measures of money supply in detail in this article.

To state it differently, the total amount of money in circulation at any given time constitutes the money supply or money stock. It is a common way for countries to measure their economies. No longer is money the most important part of our financial system. A wide range of physical and non-physical assets can replace money. So, the amount of money available depends on a number of things. Consequently, the video and text that follow will break down each of these standard measures of the money supply, including the monetary base, M1, and M2.

Measures of Money Supply

To measure the total stock of money in the economy at a specific time, one must calculate measures of money supply. M1 includes all coins, bills in circulation, and other liquid assets that can convert to cash, while M2 incorporates time deposits and money market mutual funds in commercial banks, as well as M1. Despite the fact that the Fed no longer provides M3 data, it’s worth noting that money supply M3 includes time deposits and M2. With that in mind, this topic can help you achieve your desired goals in life by outlining alternative measures of money supply.


The total of M0 and all other deposits in banks makes up M1. M1 is the base measure of the money supply. The term means “transaction money.” Because it may be used immediately to make purchases, it is referred to as “transaction money.” It is referred to as “transaction money” since it can be used right away to make purchases. Since it’s easy to switch out any of these parts, this measure of the money supply is the most liquid one possible. The important measures of money supply is this.

The Reserve Bank of India keeps track of the amount of money in circulation, the demand deposits at commercial banks, and the other deposits it has.


M2, which make up of M1 plus marketable securities and less liquid deposits, is the most common way to measure the amount of money in circulation.

M2 is a better measure of the money supply than M1 because it includes more types of money. Money market funds and savings accounts at the post office (M1). Since you can’t use a check to get money out of a Post Office Savings Bank Savings Deposit, they led to Msub>2/sub>. To calculate M2, add Savings Deposits with Post Office Savings Bank to M1. This is critical measures of the money supply.


All money market funds include in the M3 money supply, which comprises the M2 money supply. (mutual funds, repurchase agreements, commercial papers, etc.). M3 is a much better way to measure the money supply than M1. This group is made up of M1 and Bank Net Time Deposits. M3 calculate as M1 plus Net Time Deposits with Banks.


M4 money supply comprises of assets held outside commercial banks that are the least liquid, in addition to M3. M4, the fourth and final measure of the amount of money in circulation, includes both M1 and M3. In contrast to NSC, it does include M3, which is the total amount of deposits at the Post Office Savings Bank (National Saving Certificate). M4 calculate as M3 plus Total Deposits with Post Office Saving Bank

Public’s Liquid Cash

By law, commercial banks must set aside a certain amount of deposits from customers to use in times of crisis. Banks make more money flow by letting buyers borrow their extra cash reserves. The measures of money supply are the total amount of cash and cash equivalents such as savings accounts that is circulating in an economy at a given point in time.

Reserve Bank Deposits

The Reserve Bank of India is where foreign governments, banks, the IMF, the World Bank, public financial institutions, and other groups put their money.

The Reserve Bank of India does not count deposits made by commercial banks or the government. Because India’s money supply is small, “Other deposits with RB” don’t have much of an effect on the country’s monetary system.

Commercial Bank Reserves

Moreover, if more cash is kept at home, there’s a tendency to spend less; however, depositing the same amount in a bank account would boost the money supply.

Public’s Currency and Coins

The monetary system is based on banknotes and coins. Notes and coins made by governments or banks are not part of the definition of transaction money.

The central government creates fiat money, also known as currency money, which is used to repay debts. Money takes for legal transactions. People call cash and coins “money,” and they are a part of the public component. With the money, debts, and duties can pay off in the right way.

Banks Demand Deposits

The second part of the money supply is deposited from the general public in commercial banks. Demand deposit accounts let you cash checks at any time. Demand deposits can be thought of as money because they are used so often.

Simply put, M1 is made up of deposits that can be used right away. Not included are bank deposits made at other banks. Banks hold interbank deposits on behalf of other banks. These deposits, not utilizing government funds, do not get include in M2.

High-Powered Money

Cash and bank deposits are both types of hard currency. Because they are liquid, they can change a country’s money supply right away.The RBI uses four measures of money supply

Reserve Ratio 

The central bank needs a certain ratio of cash on hand to the amount of money in bank accounts. If the central bank raises the ratio, banks will have to hold more reserves, which will make it harder for them to lend money. These is essential measures of money supply.

Frequently Asked Questions

Who Regulates the Money Supply?

Furthermore, by working with commercial banks and other financial institutions, the central bank is able to set up monetary policy that adjusts the amount of money available in response to the state of the economy. Ultimately, the central bank is responsible for overseeing a country’s money system.

What are the Typical Measures of Money Supply?

Some measures of the money supply are M1, M2, and the monetary base. Federal Reserve banks and other depositories hold reserves in addition to the money in circulation, making up the monetary base. These are critical measures of the money supply.

What Happens When the Money Supply Increases?

When more money is available to the public, people have more money to spend. The price of something will go up if more people want it. The frequent usage of currency exacerbates inflation.


M0, M1, and M2 constitute the total amount of money, with the Federal Reserve utilizing these to analyze the impact of open market operations on the economy. M0 consists of cash and bank reserves, while standard measures of money supply (M1) include M0, demand deposits, and travelers’ checks.. Money supply (M2) is a broader measure of the money supply than money supply (M1) alone, and it can use to compare inflation to gross domestic product. Read on to discover everything there is to know about measures of money supply and to become a subject matter expert on it. Stay informed by reading more about the components of money supply.

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