Money supply

Definition

Money supply is the total amount of monetary assets available in an economy at a specific time. It includes cash, coins, and balances held in checking and savings accounts.

5 Must Know Facts For Your Next Test

1. Money supply directly impacts interest rates, which in turn affects the time value of money calculations.
2. Changes in money supply can influence inflation rates, thus affecting the real return on investments.
3. Central banks control money supply through monetary policy tools like open market operations and reserve requirements.
4. An increase in money supply typically leads to lower interest rates, making borrowing cheaper and encouraging spending and investment.
5. Measuring money supply involves different aggregates such as M1 (cash and checking deposits) and M2 (M1 plus savings deposits).

Review Questions

• How does an increase in money supply generally affect interest rates?
• What are some tools used by central banks to control the money supply?
• Why is understanding the money supply important when calculating the time value of money?

Related terms

Time Value of Money (TVM): The concept that a sum of money has greater value now than it will in the future due to its potential earning capacity.

Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Interest Rates: The cost of borrowing or the gain from lending, often influenced by central bank policies and changes in the money supply.