Economics defines money supply as the total assets of stock that is accepted as an exchange media at a given time in an economy. Money supply has a standardized representation with three monetary components which has been delineated as M0, M1 and M2.
The M0 component comprises of the currency which is in the hands of the public, the statutory deposits of the banks held by the central bank and its cash reserves. This component represents central bank’s monetary liabilities. The M0 is, thus, generally referred to as the reserve money or monetary base of the economy. The next standard component, M1 includes the currency that is present outside the banking system and the transaction currency of the commercial bank current account liabilities. This component may include foreign currency deposits which are needed in domestic transactions.
The M2 component of money supply tries to expand the liquid assets range to add up few interest earning items like fixed deposits, saving deposits or time deposits. This is a broad component of money supply and takes into account M1, short term savings, deposit certificates, transferable foreign currency deposits as well as repurchase agreements. Some countries have extended the broad component of money supply beyond M2.
The M0, M1 and M2 are considered the primary money supply components or monetary aggregates which satisfy the liquidity criteria. However, there can be other cases where the broader measurements are required. For example, when there are less liquid financial assets, M3 and M4 components are taken into account.
The M0 component comprises of the currency which is in the hands of the public, the statutory deposits of the banks held by the central bank and its cash reserves. This component represents central bank’s monetary liabilities. The M0 is, thus, generally referred to as the reserve money or monetary base of the economy. The next standard component, M1 includes the currency that is present outside the banking system and the transaction currency of the commercial bank current account liabilities. This component may include foreign currency deposits which are needed in domestic transactions.
The M2 component of money supply tries to expand the liquid assets range to add up few interest earning items like fixed deposits, saving deposits or time deposits. This is a broad component of money supply and takes into account M1, short term savings, deposit certificates, transferable foreign currency deposits as well as repurchase agreements. Some countries have extended the broad component of money supply beyond M2.
The M0, M1 and M2 are considered the primary money supply components or monetary aggregates which satisfy the liquidity criteria. However, there can be other cases where the broader measurements are required. For example, when there are less liquid financial assets, M3 and M4 components are taken into account.