Money Supply

The money supply is a measure of all the money that is available in an economy. Money can be classified in several ways, with each one resulting in a different money supply. The strictest classification, M0, refers exclusively to actual cash. M0 is also known as the monetary base.

Banks can extend the money supply beyond the monetary base through lending. M1 is M0 plus “cash equivalents” which can be easily converted into cash. This generally references people’s deposits in bank accounts. M2 is M1 plus “near-cash” assets that can be converted into cash relatively easily, such as savings accounts or short term investments. There are other measures of money supply with different classifications of money.