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.

Link with inflation

Monetary exchange equation

Money supply is important because it is directly linked to inflation by the "monetary exchange equation":

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velocity × money supply = real GDP × GDP deflator

Related Topics:
Velocity - Real GDP - GDP deflator

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where:

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• velocity = the number of times per year that money changes hands (if it's a number it's always simply GDP / money supply)
• money supply = money supply
• real GDP = nominal GDP / GDP deflator
• Gross Domestic Product deflator = measure of inflation Money supply may be less than or greater than the demand of money in the economy

Or PY = MV.

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P (the price level) times Y (real output) equal M (money stock) times V ("velocity") (http://www.hussmanfunds.com/wmc/wmc040524.htm).

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In other words, if the money supply grows faster than real GDP (unproductive debt expansion), inflation must follow as velocity has been shown to be relatively stable.

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Percentage

In terms of percentage changes (to a small approximation, the percentage change in a product, say XY is equal to the sum of the percentage changes %X + %Y). So:

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%P + %Y = %M + %V

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That equation rearranged gives the "basic inflation identity":

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%P = %M + %V - %Y

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Inflation (%P) is equal to the rate of money growth (%M), plus the change in velocity (%V), minus the rate of output growth (%Y).

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