Money supply

Money supply is simply the amount of money available in the economy. There are several ways of measuring the various sorts of money, depending on how wide you make the definition.

In the UK, M0 – also called narrow money – includes only the most liquid types of money: cash, cash in bank tills, and deposits held at the Bank of England. M4 (M3 in the US) consists of cash, current-account deposits at banks and other financial institutions, and savings deposits.

Central banks keep a close eye on the money supply in the belief that it affects prices. If the amount of money in circulation rises, and the number of goods produced does not, then prices rise. This is called demand ‘pull inflation’, which in turn leads to commodity price rises that push other prices higher and creates ‘push inflation’.

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