Money supply

What is the money supply?

The money supply, also known as the money supply, is the amount of money that an economy has for a specified period of time, whether in the hands of the State, families or companies (economic agents).

This money supply is generated by the monetary base or circulating money, and is determined by the central banking system of that country together with the private sector.

Components of the money supply

Two fundamental elements make up the money supply:

Money supply formula

The formula used to calculate the money supply is as follows:

Formula for calculating the money supply.

The components to be used in said formula are the following:

• OM: money supply.
• (m): monetary multiplier.
• (b): monetary base.

The monetary base constitutes the cash that the members of a population maintain, which is not in the Central Bank, plus bank reserves, that is, the money in the hands of the Central Bank.

On the other hand, the money multiplier It is that factor that allows you to multiply the money based on an initial amount.

In conclusion, the money supply equation comprises the following:

• The money supply equals the money base, multiplied by the money multiplier.
• The money supply, divided by the base, equals the money multiplier.

Importance of the money supply

The money supply plays a very relevant role in the economy, since it allows determine and control inflation, in addition to being aware of domestic consumption.

In this way, if the currency or circulating money is excessive, the value of this amount is simply wasted or leads to inflation, which generates problems in the economy. On the other hand, if the money supply is well controlled, avoid poverty and economic crisis.