Komiachko M.

PhD Zhukova O.S.

PhD Petrachkova O.L.

Donetsk State University of Management

Money supply and its measures

Money supply is the amount of money freely circulating in an economy. Money supply is made up of currency and bank deposits. Economists divide money into four categories known as measures: Ml, M2, M3, and L.

This breakdown measures, the money supply by degree of liquidity. Liquidity refers to how easy it is to convert money into cash - the most liquid form of money. Checking accounts represent the next most liquid form because money in a checking account can be easily withdrawn by writing a check. Savings accounts are slightly more difficult to access than checking accounts and therefore are less liquid. Certificates of deposit are still less liquid because money cannot be withdrawn before a specified date without a penalty.

Each measure of money includes a portion of the money supply that is more liquid than the next measure - that is, Ml is more liquid than M2. The measures are cumulative; each measure includes the forms of money (cash, savings accounts, US treasury bonds, etc.) counted in the previous measure, plus additional, less liquid forms. For example, M2 includes Ml plus certain additions.

M1 is the most liquid measure and includes cash, travellers' checks, and demand deposits — checking accounts from which money can be withdrawn on demand: In 1994 Ml in the United States accounted for over $1.1 trillion on a daily basis. M2 is less liquid. It consists of Ml plus savings deposits-of $100,000 or less. M3 consists of M2 plus savings deposits of more than $100,000. L consists of M3 plus government securities, such as savings bonds and treasury notes.

In the United States, money supply is regulated by the Federal Reserve Bank in one of three ways: buying and selling government securities; raising or lowering banks' required reserve ratio (percentage of their total deposits that banks must maintain at Federal Reserve Banks); and raising or lowering the discount rate (interest rate banks pay to borrow money from the Federal Reserve).

Money supply is an important aspect of government monetary policy.
Governments use monetary policy, alongside fiscal policy (which is concerned
with taxation and spending), to maintain economic growth, high employment, and low inflation. In the United States, monetary policy is determined by the Federal Reserve's Board of Governors.

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