Money supply is the state's supply of money.

The money supply serves the movement called money circulation.

The totality of all the money in a given country held by the government, firms, banks, citizens, in accounts, on the move, in wallets, in “stockings”, etc. forms national money supply. Money circulation as a totality is divided into cash and non-cash. Non-cash circulation is much higher than cash (Fig. 1):

Rice. 1. The ratio of cash and non-cash money supply in

In countries with an unreliable banking system, the ratio of cash and non-cash money supply looks different (Fig. 2):

Rice. 2. The ratio of cash and non-cash money supply in

The concept of liquidity is used not only in relation to, but also to, the international monetary system, etc. Liquidity in relation to money is its ability to be used by its owner for the immediate acquisition of necessary goods. Depending on the specific form in which money exists (cash and non-cash), the liquidity of money increases or, conversely, decreases. Thus, cash is much more liquid than non-cash money, and in the non-cash money supply, money in current accounts, which can be used through checks, transfers, credit cards, is much more liquid than money in time deposits, since the latter have a time limit during which the account owner does not can use the entire amount of the deposit, but only the interest on it.

Liquidity of various forms of money according to the degree of increasing liquidity:

• Money in time and savings bank deposits;
• Money on demand deposits (current) checks, bills, payment orders, credit cards, electronic money, traveler's checks;
• Cash, banknotes, banknotes, treasury notes, loose change, securities;

System of money supply aggregates

Since 1992, the Russian Federation has switched to calculating monetary aggregates.

The money supply is divided by monetary aggregates(from to), which includes different types of money.

Monetary aggregates are a grouping of bank accounts according to the rate at which funds in these accounts are converted into cash. The faster the funds in the accounts can be converted into cash, the more liquid the aggregate is considered.

The system of money supply aggregates is "matryoshka", in which each previous unit is “inserted” into each subsequent one.

Money supply M0

To the unit M 0 includes all types of money with a high degree of liquidity.

Different types of money and different types make it possible to introduce a certain classification of money depending on the degree of its liquidity and scope of application. This was expressed in the creation of a system of monetary aggregates used in the analysis of the national monetary circulation systems of various countries. The original unit includes cash and checks:

M 0 = C + checks,

Where WITH— initial money supply (cach).

Cash, in turn, consists of paper money, banknotes and small change.

1st sign. Cash is issued into circulation in the Russian Federation, and then the Central Bank of the Russian Federation takes measures to preserve its purchasing power. Thus, cash is a debt obligation of the Central Bank of the Russian Federation, that is, the Central Bank of the Russian Federation guarantees its purchasing power.

2nd sign. Non-cash money listed on current accounts and other demand accounts and urgent accounts. These are debt obligations to their clients. At the same time, the Central Bank of the Russian Federation controls and regulates the activities of commercial banks, ensuring the liquidity of commercial banks, that is, the ability to pay debts.

3rd sign. Banknotes, coins, and non-cash money in circulation in the form of entries in accounts are legal means of payment. Therefore, they are accepted as payment for dogs according to their functions.

4th sign. Modern money (in the narrow sense of the word) is convenient and acceptable for people to use.

5th sign. M 1 has absolute liquidity, therefore M 1 banknotes that perform the functions of money.

Money supply M2

In addition to money, that is, the aggregate, the money supply includes purchasing and means of payment that do not have absolute liquidity. These include bills, bonds, and certificates of deposit. In non-cash form: time deposits in bank accounts.

Unit M 2 complements to M 1 time deposits:

M 2 = M 1 + time deposits.

With a fixed-term deposit, the account owner transfers his funds to the bank for some time. If necessary, money can be withdrawn from the time deposit before the maturity date, but in this case the client may experience losses (interest on the deposit is not paid). This shows that the fixed deposit is almost money. In the conditions of the Russian Federation, the level of liquidity of the unit is close to absolute, so usually a fixed-term deposit is issued to the client upon request.

Funds on time deposits further reduce the liquidity of the unit M 2 compared with M 1 And M 0 and involve servicing savings, savings, and investments.

Money supply M3

Unit M 3 assumes an increase in the unit M 2 due to:

M 3 = M 2 + government securities.

These papers (mainly government bonds) are no longer fully-fledged money, but they can still be transformed into other types of money (sold on the open market) and for this reason they are included in the money supply (Fig. 3).

Money supply structure

The structure of the money supply is constantly changing.

In the modern monetary system, the growth rate of the money supply has noticeably decreased and money began to work better. In the Russian Federation, one of the disadvantages of the monetary system is the large share of cash (42-65%), while in developed countries this figure barely reaches 7-10%.

Rice. 3 The structure of the money supply, represented by a system of aggregates (from to)

The ratio between aggregates changes depending on economic growth.

Changes in the volume of money supply are the result of the influence of two factors:

• change in the amount of money in circulation;
• change in the speed of their turnover.

Change in turnover rate

The velocity of money circulation is determined using indirect methods:

Speed ​​of circulation of money in the circulation of income= GDP / Money supply (M1 and M2). This indicator reveals the relationship between economic growth and money circulation.

Cash turnover rate= Income according to the forecast of the balance of cash turnover / the average annual value of the money supply in circulation.

Turnover of money in payment circulation(shows the speed of non-cash payments) = Amount of funds in settlement, current and forecast accounts (bank accounts) / average annual money supply in circulation.

The change in the speed of money turnover depends on:

• general economic factors showing how production is going, how the cyclical nature of economic development is changing, rising prices, growth rates of the most important sectors of the economy;
• monetary factors: what is the structure of payment turnover (how much cash and non-cash money is involved), the development of credit operations, the development of mutual settlements, the level of interest rates on the loan;
• frequency of payments of money and income, level of savings and savings, uniformity of spending money.

The effect of inflation on the growth of the velocity of money circulation is explained by the fact that buyers increase purchases in order to protect themselves from economic losses due to a decrease in the purchasing power of money.

Rules for regulating the structure of the money supply

Dividing the money supply by , , , is necessary if it is necessary to ensure state regulation of the volume of money supply and prevent unexpected events (price rises).

When circulating money, it is not only the amount of absolutely liquid money that is important M1, but also that amount of money M2, which can quickly turn into M1. Also M3 may, under certain conditions, become a means of payment M1.

By distributing the money supply into aggregates, the Central Bank of the Russian Federation influences the money supply M1, increasing it or decreasing it (or restraining its growth).

Example. In case of high inflation, the Central Bank pursues a policy to reduce the money supply M1. To do this, the Central Bank sells, on behalf of the government, large denomination government securities of other firms and banks, i.e. M1 - M3 (the money supply M1 decreases).

For the population, the Central Bank of the Russian Federation sells securities of lower denominations and M1 - M2, the money supply M1 decreases.

Rule: if money goes into the banking system for a time deposit or into the budget, the money supply M1 decreases, money leaves the sphere of circulation M1.

If the Central Bank of the Russian Federation increased the interest rate at which banks are credited, commercial banks, in turn, raise the interest rate on time deposits.

It has become profitable for people (depositors) to make time deposits - M2 increases, and M1 decreases - inflation is contained.

For the duration of the deposit, the money went to the disposal of the banking system (- M2).

Monetization rate

An important indicator of the state of the money supply is monetization ratio, equal

The monetization coefficient allows us to answer the question: is there enough money in circulation? It shows how much the gross product is backed by money (or how much money is per ruble of GDP).

The monetization coefficient reaches 0.6, and sometimes is close to one. In Russia this figure barely reaches 0.1.

To analyze changes in cash flow on a specific date and for
a certain period in financial statistics began to be used first in
economically developed countries, and then in our country (meaning Russia. Ed.) monetary aggregates
M0, M1, M2, M3, M4.
Aggregate M0 includes cash in circulation: banknotes,
metal coins, treasury notes (in some countries).
Metal coins, which make up a small portion of cash (in
developed countries 2-3%), enable individuals to carry out small transactions.
These coins are usually minted from cheap metals. Real value of the coin
significantly lower than nominal, in order to prevent them from being melted down for
profitable sale in the form of bullion.
Treasury notes are paper money, the issues of which are carried out
Treasury. Paper money now operates in underdeveloped countries.
For example, in the Republic of Djibouti, treasury notes are in circulation
(in denominations of 500, 5000, 1000 francs) and coins, the issues of which
carried out by the Treasury; treasury notes and coins function and
in the Kingdom of Tonga.
The predominant role belongs to banknotes.
Aggregate M1 consists of aggregate M0 and funds in current bank accounts.
Funds in the accounts can be used for non-cash payments,
through transformation into cash and without transfer to other accounts. For
settlements using funds on these accounts, their owners issue payment
orders (the predominant form of payments in the Russian economy) or checks and
letters of credit. It is the M1 unit that services operations for the sale of gross
domestic product (GDP), distribution and redistribution of national
income, savings and consumption.
Aggregate M2 contains aggregate M1, time and savings deposits in
commercial banks, as well as short-term government securities.
The latter do not function as a means of exchange, but can
turn into cash or checking accounts. Savings deposits in
commercial banks are withdrawn at any time and converted into cash
Time deposits are available to the depositor only after a certain period of time
and, therefore, have less liquidity than savings
deposits. In the USA, the M2 unit includes:
M1 - 23% (including cash 7% and check deposits 19%),
savings and time deposits - 74%.
Aggregate M3 contains aggregate M2, savings deposits in
specialized credit institutions, as well as securities,
traded on the money market, including commercial bills,
issued by enterprises. This part of the funds invested in securities
is not created by the banking system, but is under its control, since
transformation of a bill into a means of payment requires, as a rule, the bank’s acceptance,
those. guarantees of payment by the bank in the event of insolvency of the issuer.
Aggregate M4 is equal to aggregate M3 plus various forms of deposits in credit
institutions.
There must be balance between the units, otherwise
violation of monetary circulation. Practice suggests that balance
occurs when M2 > M1; it strengthens at M2 + M3 > M1.
In this case, money capital moves from cash circulation to
non-cash. If this relationship between aggregates in monetary terms is violated
circulation complications begin: a shortage of banknotes, rising prices, etc.
Countries use different amounts to determine their money supply.
units (for example, the USA - four, France - two). In Russia for calculation
of the aggregate money supply, the aggregates M0, M1, M2 M3 are used to monetary
units include; M0 - cash in circulation; M1, except M0 -
funds of enterprises in settlement, current, special bank accounts,
deposits of the population in savings banks on demand, funds
insurance companies; M2; equals M1 plus time deposits of the population in
savings banks, including compensation; M3 consists of M2 and
certificates, government loan bonds.

Money supply M1

Money supply M1

M1 money supply - in the United States - the narrowest measure of money supply, including deposits not owned by the federal government, central bank or financial institutions:
+ cash (currency); the share of cash in M1 is less than 1/3;
+ funds in current accounts (transaction deposits);
+ demand deposits;
+ other deposits for which checks can be written (other checkable deposits).
The M1 structure does not include “plastic money”.

In English: Monetary aggregate M1

Synonyms: Money for transactions

English synonyms: Transaction money

Finam Financial Dictionary.

See what “Monetary aggregate M1” is in other dictionaries:

The US has the broadest definition of money supply. L = M3 + short-term treasury securities. In English: Monetary aggregate L See also: Monetary aggregates Financial Dictionary Finam... Financial Dictionary

In the United States, a measure of money supply, covering the means of circulation and means of storage. M2 = M1 + + money market deposit accounts; + shares of open-ended investment funds (money market mutual fund shares); ... Financial Dictionary

In the USA, a measure of money supply covering M2 + large time deposits ($100 thousand or more); + buyback agreements with long terms. In English: Monetary aggregate МЗ See also: Monetary aggregates Financial dictionary… … Financial Dictionary

money supply- A composite monetary variable used to measure the money supply in circulation (and as such sometimes taken as an intermediate objective of monetary policy or an indicator of the state of the monetary sector), which includes... Technical Translator's Guide

- (M1) Broader measure of money supply. In the UK, M1 includes banknotes and coins in circulation plus funds in private sector current accounts plus funds in deposit accounts against which checks are drawn. In the USA it is... ... Economic dictionary

- (M0) The narrowest measure of the money supply used in the UK. It includes banknotes and coins in circulation, banks' cash on hand and balances in correspondent accounts of commercial banks in... Economic dictionary

- (M2) The indicator that most closely matches the definition of money in the broad sense of the word. In the UK, M2 includes banknotes and coins in circulation plus funds in non-interest bearing bank deposits, plus funds on deposits... ... Economic dictionary

Money supply L- MZ money supply plus other liquid assets (for example, US Treasury bills and savings bonds) ...

Money supply M2- monetary aggregate Ml plus the following components: 1) savings deposits and small time deposits in all depository institutions; 2) one-day REPO agreements with commercial banks; 3) one-day loans in Eurodollars from US residents... ... Modern money and banking: glossary

Monetary supply of the Ministry of Health- monetary supply M2 plus the following components: 1) large time deposits (over $100,000) in all depository institutions; 2) term REPO agreements with commercial banks and savings and loan associations; 3) mutual funds... ... Modern money and banking: glossary

In addition to money, that is, the aggregate, the money supply includes purchasing and means of payment that do not have absolute liquidity. These include bills, bonds, and certificates of deposit. In non-cash form: time deposits in bank accounts.

Unit M2 complements to M1 time deposits:

M2 = M1 + time deposits.

With a fixed-term deposit, the account owner transfers his funds to the bank for some time. If necessary, money can be withdrawn from the time deposit before the maturity date, but in this case the client may experience losses (interest on the deposit is not paid). This shows that the fixed deposit is almost money. In the conditions of the Russian Federation, the level of liquidity of the unit is close to absolute, so usually a fixed-term deposit is issued to the client upon request.

Funds on time deposits further reduce the liquidity of the unit M2 compared with M1 And M0 and involve servicing savings, savings, and investments.

Money supply m3

Unit M3 assumes an increase in the unit M2 through government securities:

M3 = M2 + government securities.

These papers (mainly government bonds) are no longer fully-fledged money, but they can still be transformed into other types of money (sold on the open market) and for this reason they are included in the money supply (Fig. 16).

49. Supply and demand in the money market.

The demand for money is the amount of money that firms and the population consider it appropriate to have under given economic conditions, including income levels.

Two main reasons for the demand for money:

1) Demand for money as a means necessary for making transactions. Transactional or operational demand. This type of demand for money depends on the level of real output, the absolute price level and the velocity of money in the movement of income and does not depend on the interest rate (R).

2) Demand for money as a means of acquiring financial assets. Speculative demand. It is explained by the fact that in market conditions each individual forms a portfolio of financial assets (money, stocks, bonds). The most common alternative to money is bonds (they provide a constant stream of income). The price of a bond is the interest rate. Moreover, the price of a bond and the interest rate are inversely related.

Let's assume that there are some stable government bonds, the income on which is compared with the interest rate (Rt is the current interest rate). It is expected that the future interest rate Re< Rt (упадёт), тогда это увеличивает ценность облигаций дающих постоянный поток доходов. Значит, субъект начнет приобретать облигации и уменьшать запасы денег, рассчитывая повысить в будущем свой доход. И наоборот, если Re >Rt then you need to wait for the interest rate to rise and the value of the bonds falls. The individual will sell bonds at higher prices and increase his cash holdings. Thus, the higher the interest rate, the lower the demand for money as a means of preserving wealth. In graph 1 it looks like this:

Y is the value of GNP, which can never be equal to 0, that is, the demand line only approaches the minimum value of production volume, Rmin is the minimum interest rate. If the demand line approaches the asymptote at the level of the minimum interest rate, then the economy will fall into the so-called “liquidity trap.”

The total demand for money (Md) is equal to the sum of business and speculative demand for money and depends on the nominal interest rate and the volume of nominal GNP (Fig. 1).

Business demand for money (Mt) is determined by the level of nominal GNP (directly proportional).

Speculative demand for money (Ma) is based on the inverse relationship between the nominal interest rate and the bond price.

a) business demand; b) demand for financial assets; c) total demand

Fig.1. Business demand, demand for financial assets and general demand for money

Money supply (MS) is the totality of means of payment circulating in a country at a given moment. The supply of money also refers to the money supply in circulation and consisting of the corresponding monetary aggregates (M1, M2, M3, etc.).

The supply of money is usually graphically displayed as a vertical line, since it is assumed that at each given moment a certain, fixed amount of money has been created, formed on the basis of the issue of money (issue of money into circulation) with a monetary policy aimed at maintaining a constant mass of money in circulation (see graph 2)

The supply of money does not depend on the interest rate. In reality, the supply of money depends on the goals that are set within the framework of the monetary policy of a particular country.

Money market equilibrium is a situation in the money market when the amount of money supplied is equal to the amount of money that the population and entrepreneurs want to have in their hands.

Equilibrium in the money market is achieved at the point of intersection of demand and supply of money; at this point the equilibrium interest rate is established. If the demand for money increases, then the interest rate will also increase and vice versa.

If the money supply increases, then the money supply schedule will move from position MSe to position M1. And vice versa, when the money supply decreases, the graph shifts to the left to position MS2. If the supply of money is greater than demand (excess), people seek to free themselves from money: they buy bonds and other securities, the price of bonds rises, and the interest rate (R) falls. As interest rates fall, the demand for money increases.

If the supply of money is less than demand (shortage), people need money, they begin to sell bonds, stocks (their price falls), and the interest rate rises; if the interest rate rises, the demand for money falls.

Supply and demand in the money market.

The money market is a market in which a special commodity, money, is bought and sold. Its main elements are the supply of money, the demand for money, the price of money (loan interest rate i). The total amount of money available in a country is the money supply. Modern monetary circulation in developed countries is different in that the bulk of monetary transactions are carried out in non-cash form. The role of money is played not only by cash, but also by demand deposits, time deposits, etc. Therefore, to calculate the amount of money, economists introduced the concept of monetary aggregates (M1, M2 ...), the number of which varies in different countries (there is also some specificity in their definition). Let's consider the structure of monetary aggregates in the United States: M1 - cash (coins and paper money) in circulation, plus demand deposits (checkable deposits); M2 - aggregate M1 plus the amount of savings deposits and small time deposits (up to $100,000); M3 - aggregate M2 plus large time deposits; L - aggregate M3 plus some types of securities (short-term securities and US Treasury bonds, etc.). In economic theory, money is understood as M1, i.e. money servicing current turnover. The supply of money is controlled by the state. The central bank does this both by issuing money and by managing the country’s monetary system. He determines the required amount of money based on the state of the economy. The amount of money is fixed for a certain period and does not depend on the level of interest rates. Therefore, the money supply curve S m is a vertical line perpendicular to the x-axis at the point corresponding to the quantity of money (Fig. 18.1). The demand for money is formed in all sectors of the economy. It is determined by two functions of money: to be a means of circulation and a means of accumulating (preserving) wealth. Accordingly, the aggregate demand for money includes: a) the demand for money for transactions; b) demand for money as a means of preserving wealth (demand for money from assets). The demand for money for transactions is determined by the fact that economic entities need money for purchases and payments

Rice. 18.1. Money supply

Rice. 18.2. Demand for money for transactions (a), from assets (6) and aggregate demand for money (c)

(trading transactions). The more goods and services are produced in a society, the more purchases are made and the greater the demand for money for transactions. Consequently, it depends primarily on the volume of the nominal gross national product: the higher it is, the more money is needed for transactions and vice versa. Let us assume that the required amount of money is not associated with a change in the interest rate. Since the volume of GDP in a given year is a constant value, then, taking into account our assumptions, the demand curve for money for transactions Dt will look like a vertical straight line (Fig. 18.2, a). Let us now consider the demand for money as a means of preserving wealth, i.e. demand for money from assets. It is due to the fact that the population prefers to keep part of their saved income in the form of money. This demand depends on income on securities. This is due to the fact that, saving part of their income, the population always decides in what form to keep their savings. It can distribute them between money and securities. Money does not bring income to its owner, but has absolute liquidity, i.e. can be converted into needed goods and services immediately and at no cost. Securities (for simplicity, we will assume that there is only one type of securities - government bonds) bring a stable income in the form of interest, but are less liquid. Therefore, the choice of savings placement option depends on the level of the interest rate: the higher it is, the greater the demand for bonds and the less for money and vice versa. Consequently, the demand for money from assets is inversely related to the level of interest rate i and has the form of a descending straight line D a (Fig. 18.2, b). Aggregate demand

Rice. 18.3. Money market equilibrium. Change in money supply

for money D m can be obtained by summing the demand for money for transactions and the demand for money from assets (Fig. 18.2, c). The demand for money must be satisfied by its corresponding supply. Equilibrium between supply and demand is achieved at the point of intersection of the curves S m and D m, i.e. at point E (Fig. 18.3). This point determines the equilibrium interest rate i E i.e. the price of money. The optimal state of the money market is equilibrium. However, it is constantly being violated. Let us consider how changes in the money supply affect the equilibrium. We will assume that the demand for money D m is constant. Let us assume that the money supply has decreased from S m to S m1 (see Fig. 18.3). Since the population does not have enough money, in order to obtain the necessary funds, it will begin to sell bonds. An increase in the supply of bonds on the market will lead to a decrease in their prices. However, the market price of bonds and the interest rate are inversely related. Let's prove it. Let the bond price be $100 and the income be $10 per year. Then the interest rate will be:

Let's assume that an increase in the supply of bonds on the market led to a decrease in their exchange rate by $80. Since the income on bonds is fixed, the interest rate i 1 will be:

Consequently, the sale of bonds by the population will cause a decrease in the market price of bonds and an increase in the interest rate. As it rises, the demand for securities will increase and the demand for cash will decrease, which corresponds to a movement up and to the left along the demand curve. When the interest rate becomes equal to i 1, the money market will reach a new equilibrium position at point E 1. An increase in the money supply will shift the curve S m to the right, to the position S m2 (see Fig. 18.3). At the current interest rate, the supply of money will be greater than the demand. Trying to make the most efficient use of the available “extra” money, the population will begin to invest it in securities. Demand for bonds will increase, their market price will increase, which will lead to a decrease in interest rates. As it decreases, the demand for money will increase. The new equilibrium position will be established at point E 2 at the interest rate i 2 . Now we will show how the equilibrium position and the interest rate will be affected by a change in the demand for money. We will assume that the money supply S m is constant. The equilibrium market is initially determined by demand D m and interest rate i E . Let's say the demand for money increased from D m to D m1 (Fig. 18.4). At the existing interest rate i E, the demand for money will be greater than its supply S m. The population will begin to sell bonds, trying to increase the required amount of money. The market price of securities will decrease, which will lead to an increase in interest rates

Rice. 18.4. Money market equilibrium. Change in demand for money

rates. As it grows, the demand for money will decrease, which will lead to the restoration of equilibrium at point E 1 at the interest rate i 1. A decrease in the demand for money will lead to a shift of the curve D m1 to position D m ​​(see Fig. 18.4). At an interest rate of ix, the supply of money Sm will be greater than the demand Dm, and there is more money available than needed. This will lead to an increase in demand for securities, an increase in their market price and a decrease in interest rates. Equilibrium in the market will be achieved only when the interest rate becomes equal to i E. Thus, imbalances in the money market lead to changes in the prices of bonds and other securities, as well as interest rates. By changing, it affects the population's demand for money and restores the balance of the money market.

50. Restoring balance in the money market.

The equilibrium of the money market is established automatically due to changes in the interest rate. The money market is very efficient and is almost always in equilibrium because the securities market has very precise dealers who track changes in interest rates and force them to move in one direction.

The supply of money is controlled by the central bank, so the money supply curve can be depicted as vertical, i.e. independent of the interest rate (M/P) S. The demand for money depends negatively on the interest rate, so it can be represented by a curve that has a negative slope (M/P) D. The point of intersection of the money supply curve and the money supply curve allows us to obtain the equilibrium interest rate R and the equilibrium value of the money supply (M/P) (Fig. 12.5.(a)).

Let us consider the consequences of changes in equilibrium in the money market. Let us assume that the quantity of money supply does not change, but the demand for money increases - the curve (M/P) D 1 shifts to the right and up to (M/P) D 2. As a result, the equilibrium interest rate will increase from R 1 to R 2 (Fig. 12.5.(b)). The economic mechanism for establishing equilibrium in the money market is explained using Keynesian liquidity preference theories. If, under conditions of a constant money supply, the demand for cash increases, people who, as a rule, have a portfolio of financial assets, i.e. a certain combination of monetary and non-monetary financial assets (for example, bonds), experiencing a shortage of cash, begin to sell bonds. The supply of bonds in the bond market increases and exceeds demand, so the price of bonds falls, and the price of a bond, as has already been proven, is inversely related to the interest rate, therefore, the interest rate rises. This mechanism can be written as a logical chain: (M/R) D  IN S  R IN  R  . An increase in the demand for money led to an increase in the equilibrium interest rate, while the supply of money did not change and the quantity demanded for money returned to its original level, since with a higher interest rate (higher opportunity costs of holding cash), people will reduce their holdings of cash , buying bonds.

Let us now consider the consequences of a change in the money supply for the equilibrium of the money market. Suppose that the central bank increased the supply of money, and the money supply curve shifted to the right from (M/P) S 1 to (M/P) S 2 (Fig. 12.5.(c)). As can be seen from the graph, the result is the restoration of equilibrium in the money market by reducing the interest rate from R 1 to R 2. Let us explain the economic mechanism of this process, again using the Keynesian theory of liquidity preference. As the money supply increases, people will have more cash on hand, but some of that money will be relatively surplus (not needed to buy goods and services) and will be used to buy income-producing securities (such as bonds). The bond market will increase demand for bonds as everyone will want to buy them. An increase in demand for bonds in conditions of constant supply will lead to an increase in the price of bonds. And since the price of a bond is inversely related to the interest rate, the interest rate will fall. Let's write down the logical chain: (M/R) S  IN D  R IN  R  . So, an increase in the money supply leads to a decrease in the interest rate. A low interest rate means that the opportunity cost of holding cash is low, so people will increase the amount of cash they have, and the quantity demanded for money will increase from (M/P) 1 to (M/P) 2 (movement from point A to point B along money demand curve (M/P) D).

Thus, liquidity preference theory assumes an inverse relationship between the price of a bond and the interest rate and explains the equilibrium of the money market as follows: a change in the demand for money or supply of money corresponding changes in the supply and demand for bonds, which causes a change in and through bond prices - in interest rates. A change in interest rates (which changes the opportunity cost of holding cash) affects people's desire to hold cash (preferring its liquidity), and a change in people's desire to hold cash restores equilibrium in the money market, the equilibrium interest rate equalizes the amount of cash supplied and demanded .

Money supply- an indicator of the amount of money or financial assets classified as money supply

Money supply M2

Second money supply M2 has a broader character than the M1 monetary aggregate since money in it is also used as a means of storage. It includes those assets that have a fixed nominal value and can be converted into a means of payment. But the directly specified assets cannot be transferred from one person to another. The most familiar to us are deposit accounts, demand deposits and time deposits. They do not allow asset owners to use checks, and demand deposits earn negligible interest. In addition, in the financial markets of developed countries, the M2 monetary aggregate includes money market mutual funds, i.e., those intermediaries that provide so-called property titles to the public and use the proceeds to buy short-term securities with a fixed interest rate. The profits generated from these securities pass to the title holders. Although in principle money market funds can be used for payments, in practice this rule is rarely used.

The M2 monetary aggregate includes highly liquid financial assets, such as time deposits and short-term government securities, which, although they do not function directly as a medium of exchange, are easily converted into cash. This way you can withdraw cash from term deposit at a commercial bank or savings institution. Or you can request a transfer of funds from such an account to a current account.

It is necessary to pay attention to the fact that each country has its own official definition of the M2 monetary aggregate. For example, in the UK, M2 is a measure of the money supply, including cash in circulation, private sector sterling current and interest-bearing bank accounts, deposits in building societies and savings banks; in the USA - M1 plus savings accounts, time accounts up to 100 thousand dollars, one-day Eurodollar deposits, shares of money market mutual funds, etc. Therefore, while generally understanding the essence of this monetary aggregate, the nuances can vary significantly.

In general, the M2 monetary aggregate is intended not for circulation, but for accumulation, and that is why it is characterized as a liquid store of value. It is the relationship of the state with M2 that causes the need for devaluation and revaluation of the currency.

The M2 monetary aggregate better reflects the relationship of the money supply with other economic variables appearing in
equation of monetary exchange: M * V = Py, namely with the velocity of money V, the weighted price level P and the real volume of production y. Therefore, since the 80s, many economists began to be inclined to think that the M2 parameter is more suitable as a basis for the theory and implementation of economic policy.

There are, however, other points of view, whose supporters do not consider any of the parameters (M1, M2 and M3) optimal, and therefore recommend choosing a monetary aggregate that would represent a common weighted aggregate of all liquid assets.