Glossary · from the DESK dictionary
Money Supply
The total amount of money circulating in an economy, measured across various aggregates (M0, M1, M2, etc.).
In plain words
How much "money" exists in total in the economy — an important factor for inflation and economic growth.
In more detail
The money supply measures money in circulation, tiered by availability into several aggregates. M1 covers currency and sight deposits, M2 adds short-term time and savings deposits, M3 additionally market-like instruments. Its significance for monetary policy has declined, because the relationship between money growth and inflation became unstable. As a leading indicator of credit cycles and asset price developments it nonetheless remains informative.
Example
M1 grows 25 percent in a year while consumer prices rise 1.4. Two years later inflation is 8 percent — the relationship exists but with a lag that makes it useless as a control variable.
What it means for traders
A classic monetarist metric for assessing inflation risk.
Common pitfalls
The link between money-supply growth and inflation is disputed in modern economics and not mechanical.
Related terms
Broad Money (M2/M3) · Demand Deposit · Deposit Multiplier · Equation of Exchange · Inflation · Milton Friedman · Monetary Aggregate · Monetary Base · Near Money · Quantity Theory of Money
From the DESK dictionary. For information only, not investment advice.
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