Business Glossary

total stock of money in the economy, consisting primarily of (1) currency in circulation and (2) deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push prices and inflation up; too little money tends to push interest rates up, lower prices and output, and cause unemployment and idle plant capacity. The bulk of money is in demand deposits with commercial banks, which are regulated by the Federal Reserve Board. It manages the money supply by raising or lowering the reserves that banks are required to maintain and the discount rate at which they can borrow from the Fed, as well as by its open-market operations -trading government securities to take money out of the system or put it in.

Changes in the financial system, particularly since banking deregulation in the 1980s, have caused controversy among economists as to what really constitutes the money supply at a given time. In response to this, a more comprehensive analysis and breakdown of money was developed. Essentially, the various forms of money are now grouped into two broad divisions: M-1, M-2, and M-3, representing money and near money ; and L, representing longer-term liquid funds. The table on the next page shows a detailed breakdown of all four categories.

total amount of money available for transactions and investment in the economy. The Federal Reserve Board uses various statistical measures to measure the various forms of money that make up the money supply. The monetary aggregates in the money supply are updated weekly by the Federal Reserve Board.

When the Fed is pursuing an expansive monetary policy , the central bank adds reserves to the banking system and banks are able to make more loans. This stimulates growth in the money supply, because business borrowers keep part of their loans in the form of bank deposits.

Since 1983, when the monetary aggregates were last revised, the components of the money supply have been the following:

M1: currency held by the public, plus travelers' checks, demand deposits, Negotiable Order of Withdrawal (NOW) accounts, Super NOW accounts, Automatic Transfer Service (ATS) accounts, and credit union share drafts.

M2: M1 plus savings and small denomination time deposits, Money Market Deposit Accounts, money market mutual fund shares owned by individual investors.

M3: M2 plus large time deposits, large denomination term repurchase agreements, shares in money market mutual funds owned by institutional investors, and certain Eurodollar deposits.

L: long-term liquid assets, including M3, plus nonbank investments in U.S. savings bonds, short-term Treasury securities, commercial paper, and bankers' acceptances.

the total stock of money in the economy. Economists identify several types of "money supply," based on liquidity:
M1: the sum of currency, demand deposits (checking, NOW accounts), travelers' checks, etc.
M2:M1 plus savings and other highly liquid time deposits.
M3:M2 plus other very liquid instruments.