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Money Supply

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Business Glossary

Definitions for: money supply
money supply

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.

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