• Monetarist theory, developed in the 1950s by Milton Friedman, was the driving force of Ronald Reagan's "supply-side" economics of the 1980s. It places less emphasis on expenditure and more on money supply.

We all know what "supply" is, but "money" is harder to define. First and foremost, money is a medium of exchange - an asset used to buy and sell goods and services. Currency in circulation is money by anyone's definition, but what about funds invested in CDs? Are they money or are they long-term assets? What about the trillion dollars or so that flows through banks every night on its way to making substantive purchases? Is it part of the nation's cash on hand, or does it represent investment? The further the dollar-denominated asset veers from being a simple medium of exchange, the harder it is to categorize. That is why economists identify three separate money supplies:

  • M1: Notes and coins in circulation, money in checking accounts, and travelers' checks.

  • M2: M1 plus savings accounts, small- and medium-sized CDs and small- and medium-sized money market mutual fund shares.

  • M3: M2 plus CDs over $100,000, money market mutual fund shares over $100,000, overnight loans from customers and U.S. residents' dollar-denominated deposits at financial institutions outside the U.S.


Economic Indicators (Part 1 of 2)

Related Articles
  1. Insights

    What Part of the Money Supply is M2?

    M2 is the part of the money supply economists use to analyze and predict inflation.
  2. Investing

    Understanding Money Supply

    Money supply – also called money stock -- refers to the total amount of currency and other liquid financial products in an economy at a particular time.
  3. Investing

    What is M1?

    M1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
  4. Insights

    What is the Quantity Theory of Money?

    Take a look at the tenets, assumptions and challenges of monetarism's principal theory.
  5. Insights

    What Is Money?

    It's a part of everyone's life, and we all want it, but do you know how it gains value and how it is created?
  6. Investing

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
  7. Investing

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center