Money Supply and Its Correlation with Prices

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Money supply is the total stock of currency and other fluid instruments in a given country’s economy as of a particular time. This includes cash, coins and balances held in checking and savings accounts. In order to maintain stability of money supply, economists analyze and develop policies about it carefully. Government can implement their national policy by controlling interest rates and rising or declining the amount of money flowing in the economy. Central Bank has the authority to periodically collect, record, and publish data of money supply within their country. In the U.S., this authority is held by the Federal Reserve Bank.


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The money supply also has possible impacts on price level, inflation, the exchange rate and the business round. This is the reason why private and public sector analysis is presented. The relation between money and prices is historically associated with the quantity theory of money. An increase in money supply usually lowers the interest rate. This will produce more investments and make more money in consumers’ hands. Thus, it will also increase people expenses. In turn, businesses will react by ordering more raw materials and increasing their production, which will also increase the requirement for labor. But, an express increase in the quantity of money in the economy also has a negative effect and may cause a long-term price inflation. That’s why government has to take control over the money flowing in their country.

There are various types of money within the money supply. In general they are categorized as “M”s such as M0, M1, M2, and M3 according to the type and size of the account in which the tool is reserved. M0 and M1 are known as narrow money. It includes coins, notes and other money correspondent that can be changed easily to cash while M1 and M2 are more solid type of money. They include short-term time deposits in bank and certain money market funds. Not all of these types are broadly used by nations, and each country is free to use different classifications.

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