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Money supply ("monetary aggregates", "money stock"), a Macroeconomic concept, is the quantity of Money available within the economy to purchase Good s, Service s, and Securities . INTRODUCTION The monetary sector, as opposed to the ) and quantity (of real money balances). When thinking about the "supply" of money, it is natural to think of the total of Banknote s and Coin s in an economy. That, however, is incomplete. In the United States , coins are ''minted'' by the United States Mint , part of the Department Of The Treasury , ''outside of'' the Federal Reserve . Banknotes are ''printed'' by the Bureau of Engraving & Printing ''on behalf of'' the Federal Reserve as symbolic tokens of electronic credit-based money that has already been created or more precisely, ''issued'' by Private Banks through Fractional Reserve Banking . In this respect, all banknotes in existence are systematically linked to the expansion of the electronic credit-based money supply. However, coinage can be increased or decreased outside this system by Legal Mandate or Legislative Acts. However, at present the coin base is held in check and used as a complementary system rather than a competitive system with private bank issue of electronic credit-based money. The common practice is to include printed and minted money supply in the same metric M0. The more accurate starting point for the concept of money supply is the total of all electronic credit-based deposit balances in bank (and other financial) accounts (for more precise definitions, see below) plus all the minted coins and printed paper. The M1 money supply is M0, plus the total of all non-paper or coin deposit balances. The relationship between the M0 and M1 money supplies is the money multiplier — basically, the ratio of cash and coin in people's wallets and bank vaults and ATMs to Total balances in their financial accounts. The gap and lag between the two (M0 and M1 - M0) occurs because of the system of fractional reserve banking. SCOPE Because (in principle) money is anything that can be used in settlement of a Debt , there are varying measures of money supply. The narrowest (i.e., most restrictive) measures count only those forms of money available for immediate transactions, while broader measures include money held as a store of value. The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:
As of March 23, 2006, information regarding M3 will no longer be published by the Federal Reserve. The other three money supply measures will continue to be provided in detail. On March 7th, 2006, Congressman Ron Paul introduced H.R. 4892 in an effort to reverse this change {Link without Title} . LINK WITH INFLATION Monetary exchange equation Money supply is important because it is directly linked to Inflation by the "monetary exchange equation": where:
In other words, if the money supply grows faster than real GDP (unproductive debt expansion), inflation must follow ("inflation is always and everywhere a monetary phenomenon"). This statement must be qualified slightly, due to changes in velocity. While the Monetarists maintain that velocity is relatively stable, in fact velocity exhibits variability at business-cycle frequencies, so that the velocity equation is not particularly useful as a short run tool. Moreover, in the US, velocity has grown at an average of slightly more than 1% a year between 1959 and 2005. Percentage In terms of percentage changes (to a small approximation, the percentage change in a product, say XY is equal to the sum of the percentage changes %X + %Y). So: %P + %Y = %M + %V That equation rearranged gives the " Basic Inflation Identity ": %P = %M + %V - %Y Inflation (%P) is equal to the rate of money growth (%M), plus the change in velocity (%V), minus the rate of output growth (%Y). MONEY SUPPLY AND CASH In the U.S., as of July 28 , 2005 , M1 was about $1.4 trillion, M2 about $6.5 trillion, and M3 about $9.7 trillion. If you split all of the money equally per person in the United States, each person would end up with roughly $30,000 ($9,700,000M/300M). The amount of actual physical cash M0 was $688 billion in 2004, roughly double the $328 billion in cash and cash equivalents on Deposit at Citigroup as of the end of that year. ( {Link without Title} ) THE CENTRAL BANK The supply of money outside of coins minted by the Mint can ONLY increase if the private banks issue more by loaning into circulation through Fractional Reserve Bank Lending Practices. Subsequently paper notes are increased ONLY as they are printed by the BEP on behalf of the Federal Reserve Fractional Banking System and are swapped at par value by the Federal Reserve Bank with Private Banks for their already issued electronic credits, which are then expunged (some believe retained) from the system by the Federal Reserve Bank. Thus, these printed money tokens (notes) merely replace already issued electronic credits on a one-for-one basis. The larger definitions of the money supply, M1, M2, and M3, are types of Deposit Account s. The first balance sheet item in a bank is usually deposits. Of the money in a bank deposit, depending on Reserve Requirements , either the whole sum or some fraction of it can immediately be lent out. The borrower can buy an asset and the seller of that asset can place the proceeds in another money supply constituent Deposit . The money supply has just increased, because both the original and secondary deposits count as part of the money supply. That money can therefore continue to increase many times over. The Federal Reserve decides the level of " Reserves Of Depository Institutions ". Monetary Policy has effects on employment and output in the short run, but in the long run, it primarily affects prices. The balance sheets This is what money supply growth may look like starting with 1 new dollar of Deposits . The money is moving from left to right. The Central Bank injects money from its reserve into the economy by buying a government bond from Bank 1 for $1, Bank 1 lends the proceeds to Person 1, who buys an asset from Person 2, who deposits the proceeds at Bank 2, who loans it to Person 3, who buys a service from Person 4, who deposits the proceeds in Bank 1, and the money supply becomes $3.
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