Money supply
Also called: M1, M2
The money supply is the total amount of money in an economy. M1 counts cash and checking deposits; M2 adds savings and other near-money.
The quantity theory of money links it to prices: MV = PQ. If money grows faster than output, prices tend to rise.
Formula
M × V = P × Q (money × velocity = price level × real output)
Related terms
- Inflation: Inflation is the rate at which prices across the economy rise over time, so each dollar buys less.
- Fractional reserve banking: Fractional reserve banking is the system in which banks keep only part of their deposits as cash reserves and lend out the rest, which creates new money in the economy.
- Quantitative easing: Quantitative easing is when a central bank creates money to buy large amounts of bonds, pushing long-term interest rates down to support the economy when short-term rates are already near zero.
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.