Supply of Money Explain Measures Money Supply

¶ … Supply of Money

explain measures money supply explain definitions important.

Money

Money is defined as a medium facilitating the exchange of goods and services between trading partners Mishkin & Frederic S., 1998.

Throughout history, exchange of goods and services has taken different forms with the earliest form being barter system. Following the inadequacies of the barter system - lack of coincidence of want and convenience in trading -- generally acceptable commodities were adopted for use in trading Froyen & Richard T., 1998()

Money supply

Money supply is used to refer to total stock of assets generally accepted as the exchange medium in an economy at a particular time Froyen & Richard T., 1998.

According to Mishkin F (1999)

, economist carry on the debate what items should be included in money supply. Definition of money supply is pegged on the various considerations, the issue being examined and country or economic status Mishkin F, 1999.

Degree of liquidity and ease of conversion into asset determine the money supply. Despite the lack of a universal definition of money supply, there are standard measures of money supply.

Measurements of money supply

According to IMF money supply is a combination of deposit liabilities in a banking system and central banks currency liabilities held by firms, individual households, nonprofit institutions and the public sector as a whole IMF, 1997.

Recognized standard representations of money supply are M0, M1 and M2.

M0 is the currency in public hands of the, bank's reserves and statutory reserves deposits held for banks at the central bank. This is referred to as monetary base and the aggregate represents the monetary liability of the central bank.

M1 includes the money held outside banking system and the current deposit liabilities of commercial banks held for transaction purposes IMF, 1997()

M2 is the aggregation of money supply that broadens the range of liquid assets and includes earned interests, on savings and fixed deposit. The broad money includes the interest on deposits, certificates of deposits and transferable deposits and repurchase agreements.

Importance of the different definitions