Money Supply

The money supply is basically all of the cash that’s floating around in the economy. You know, like when they make it rain with money in the music videos. We say “basically” because the money supply can be calculated in a few different ways.

You can just count the hard currency that’s in circulation, or you can count that plus what’s in checking accounts. You can also add what’s in savings and CD accounts, and even include bank reserves and money market funds.

There’s a bunch of different types of money supply calculations because each of them is useful in different ways. Sometimes it’s useful to know what’s actually in circulation—money that’s being spent here and now—and sometimes it’s good to add up all the money out there, including what’s sitting in bank accounts and reserves.

The money supply is the domain of the central bank. They’re the ones who decide how much money is in the money supply. If the economy needs a boost, they can inject some money into the system to try to increase spending (we all spend a bit more when we feel a bit richer, right?). The central bank can also lower interest rates to give the economy a boost. Lower interest rates try to get money to come out of banks and into investments and other transactions. The central bank knows how to make it rain.