Supply of money, Managerial Economics

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The supply of money

Refers to the total amount of money in the economy.

Most countries of the world have two measures of the money stock - broad money supply and narrow money supply.  Narrow money supply consists of all the purchasing power that is immediately available for spending.  Two narrow measures are recognized by many countries.  The first, M (or monetary base), consists of notes and coins in circulation and the commercial banks' deposits of cash with the central banks.

The other measure is M2 which consists of notes and coins in circulation and the NIB (non-interest-bearing) bank deposits - particularly current accounts.  Also in the M2 definition are the other interest-bearing retail deposits of building societies.  Retail deposits are the deposits of the private sector which can be withdrawn easily.  Since all this money is readily available for spending it is sometimes referred to as the "transaction balance".

Any bank deposit which can be withdrawn without incurring (a loss of) interest penalty is referred to as a "sight deposit".

The broad measure of the money supply includes most of bank deposits (both sight and time), most building society deposits and some money-market deposits such as CDs (certificates of deposit).


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