Money Supply: What Is It, Types And What Does It Do
The money that we use for daily transactions apparently can be measured as an economic asset of a country. The government issues money in circulation in the form of coins and paper currency through the central bank.
The existence of this money supply can maintain the economic stability of a country. We use money every day, but many people don’t know that money in circulation has many types and must be controlled.
Money circulating is not only in the form of cash but also loans, credit, and even digital wallets. To better understand what money supply is, consider the following brief explanation.
Definition, Types of Money Supply and Their Impact on the Economy
The Fed is an authorized institution and makes policies to regulate the monetary resource in the United States. The monetary resource must be in the rules of financial institutions because if it cannot be traced it will affect the country’s economy.
Too much money in circulation can cause inflation. And too little money in circulation can lead to deflation. To control the monetary resource, the interest rate used by banks is made.
The Effect of the Money Supply on the State’s Economy
The more money in circulation will usually lower interest rates. If interest rates decrease, it will affect investment and make consumers a lot of money.
The business will also run easier, especially since the supply of raw materials will become cheaper. However, the opposite can happen. If the money supply decreases, raw material prices will become expensive.
Banks will also charge higher interest rates and lend less money. This also affects the running of the business, because many companies find it difficult to run operations.
Types of Money Supply
There are several types of monetary resource that you need to know:
M1
This category is the total number of coins and banknotes in circulation. Including those in a bank teller drawer or your wallet. M1’s money supply also includes money in regular savings accounts.
The banks will convert savings accounts to cash equivalents. Therefore, the account owner can withdraw cash at any time.
M2
This category is the sum of M1, money market funds, and also short-term deposits owned by banks.
M3, MO, and MB
M3 is the sum of M2 plus long-term deposits. Meanwhile, MO is used to measure cash in circulation and money reserves in banks in that country.
Meanwhile, MB is the total currency that has been added to the central bank’s reserve deposits. MB is the total between M1, M2, M3, and MO.
This does not mean that a country does not limit the circulation of money. Because a lot or a little money circulating will affect the economy. Therefore in America, the Federal Reserve is responsible for limiting and controlling the monetary resource.
If there is a balance in the money supply, interest rates are quite significant and can slow down inflation. Even so, some risks are worrying, such as slowing economic growth and a lot of unemployment.
