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.

The Central Bank

The supply of money can only increase if the money is first "printed" by the issuer of money, usually the government central bank. The central bank "prints" coins, bills and electronic money.

Related Topics:
Central bank

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The "printing" is usually done by the central bank buying government debt. The government debt can be bought directly from the government or from public holdings (primarily banks). In the United States the decision on how much government debt the Federal Reserve should buy is decided by the Federal Open Market Committee (FOMC). The process by which the M0 money supply is managed is known as open market operations.

Related Topics:
Government debt - Banks - United States - Federal Reserve - Federal Open Market Committee - Open market operations

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The larger definitions of the money supply, M1, M2, and M3, are types of deposit accounts. The first balance sheet item in a bank is usually deposits. Of the money in a bank deposit, depending on reserve requirements, either the whole sum or some fraction of it can immediately be lent out. The borrower can buy an asset and the seller of that asset can place the proceeds in another money supply constituent deposit. The money supply has just increased, because both the original and secondary deposits count as part of the money supply. That money can therefore continue increase many times over. The Federal Reserve decides the level of "reserves of depository institutions".

Related Topics:
Deposit account - Reserve requirements - Deposit - Federal Reserve - Reserves of depository institutions

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Monetary policy has effects on employment and output in the short run, but in the long run, it affects primarily prices.

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The balance sheets

This is what money supply growth may look like starting with 1 new dollar of deposits. The money is moving from left to right. The Central Bank buys a government bond from Bank 1 for $1, Bank 1 lends the proceeds to Person 1, who buys an asset from Person 2, who deposits the proceeds at Bank 2, who loans it to Person 3, who buys an asset from Person 4, who deposits the proceeds in Bank 1, and the money supply is $2.

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