The money supply is the total amount of money circulating in an economy. It includes cash, coins, and balances in checking and savings accounts. Economists measure it in layers, from narrow to broad. M1 is the most liquid: cash and checking deposits. M2 adds savings accounts and small time deposits. M3 includes larger institutional funds.

Central banks influence the money supply through monetary policy. When they buy securities, they inject money into the banking system. When they sell, they drain it. Reserve requirements also affect how much banks can lend, which multiplies the money supply through the deposit multiplier.

The relationship between money supply and inflation is not as tight as once thought. Velocity, or how fast money circulates, changes over time. During recessions, people hoard cash, slowing velocity. The link between money growth and prices is real but complex.

Common measures

• M0: base money, currency in circulation
• M1: cash plus checking deposits
• M2: M1 plus savings and small time deposits
• M3: broader including large deposits
• Velocity of money