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Economic Theory

for money, including cash and checking and savings accounts, and they
use financial institutions for this purpose.
The demand for money is the relationship between the quantity of
money people want to hold and the factors that determine that quantity.

The quantity of money available in an economy is called the money
supply. The government’s control over the money supply is called

monetary policy.
Money supply is the entire stock of currency and other liquid
instruments circulating in a country’s economy as of a particular time.
Also referred to as money stock, money supply includes safe assets, such

as cash, coins, and balances held in checking and savings accounts that
businesses and individuals can use to make payments or hold as short-term
investments.

The various types of money in the money supply are generally
classified as Ms, such as M0, M1, M2 and M3, according to the type and
size of the account in which the instrument is kept. Not all of the
classifications are widely used, and each country may use different

classifications. M0 and M1, for example, are also called narrow money
and include coins and notes that are in circulation and other money
equivalents that can be converted easily to cash. M2 includes M1 and, in

addition, short-term time deposits in banks and certain money market
funds. M3 includes M2 in addition to long-term deposits.
For instance, in the United States the Federal Reserve Bank, which is
the central bank and responsible for monetary policy and defines money

according to its liquidity. The most common measures for studying the
effects of money on the economy are M1 and M2.

M1 = coins and currency in circulation +
+ checkable (demand) deposit + traveler’s checks. (7.1)

M2 = M1 + savings deposits + money market funds +
+ certificates of deposit + other time deposits. (7.2)

The Federal Reserve System is responsible for tracking the amounts of
M1 and M2 and prepares a weekly release of information about the money
supply.

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