The financial encyclopedia uses cookies to improve your user experience. Find out more here!




Money supply


Present monetarist economic policies are geared to what are referred to as k money targets, which are various measures y g lying assumption is that price levels, i.e. inflation and the general level of economic activity, are closely related to the quantity of money in circulation. That quantity is consequently controlled by the Treasury, both directly through government financial policy and indirectly through the banking system.

There are various measures of the money supply, known as MO, Ml, M3, the last sometimes referred to as sterling M3 or SM3. At the risk of oversimplification, it can be said that MO consists of the total of circulating currency, i.e. coin and notes; Ml is MO plus the total of private sector current accounts with clearing banks; SM3 is Ml plus both public sector current accounts and all deposit accounts; M3 as opposed to S M3 also brings in foreign currency bank deposits in the U.K.; M2 was a definition somewhere between Ml and M3 but was abandoned some time ago.

abandoned some time ago. view that both price levels and economic activity are essentially functions of total demand, which itself is geared to the amount of money in circulation. MO and Ml are considered to determine short-term demand whereas in the longer term M3 must be more relevant. As all these definitions of money supply have defects, modifications have been introduced, both in an attempt to eliminate deficiencies and because they are more relevant to certain economic circumstances. The more common of these are PS LI and PSL2, where PSL stands for private sector liquidity. These modified definitions distinguish between long- and short-term deposits and exclude public sector accounts.

At present these money measures fail to take account of the potential demand represented by credit cards in circulation though attempts are being made to remedy this fault.

Reference: The Penguin Business Dictionary, 3rd edt.