Money supply

Money supply ("monetary aggregates", "money stock"), a macroeconomic concept, is the quantity of money available within the economy to purchase goods, services, and securities.

Introduction

When analysing the money supply, it is important to make a few opening remarks. First, the monetary sector, as opposed to the real sector, concerns the money market. The same tools of analysis can be applied as with other markets: supply and demand result in an equilibrium price (the interest rate) and quantity (of real money balances).

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Secondly, when considering supply and demand for money, it is important to distinguish between wealth (for which demand could very well be considered infinite) and money, which is one of many different forms of asset in which to hold wealth, alongside other common forms such as property, stocks, bonds, etc.

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Lastly, when thinking about the "supply" of money, it is natural to think of the total of notes and coinage in an economy. That, however, is the money base. Another starting point for the concept of money supply is the total of deposit balances in everyone's bank (and other financial) accounts in an economy (for more precise definitions, see below). The relationship between these two supplies is the money multiplier—basically, the ratio of cash in peoples' wallets to balances in their financial accounts. The gap between the two occurs because of the system of fractional reserve banking.

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