5.3: The Quantity of Money

The quantity of money, or money supply, is the total amount of money available in an economy. In modern economies, defining and measuring the money supply is a challenge due to the wide variety of assets used as money.

Unlike a simple system with only one form of money, today's economies feature multiple forms of money that people can access through various channels.

For example, people often use cash or a debit card for everyday expenses, such as buying groceries. The debit card directly accesses funds from a checking account. Digital tools, such as a bank’s mobile app, allow people to pay bills by transferring money from their checking account. When planning larger purchases, such as a vehicle, people often move funds from a savings account into their checking account. Additionally, if required, funds can also be drawn from a money market deposit account.

So, many methods of payment often rely on funds stored in various types of bank accounts, such as checking, savings, or money market deposit accounts. The ease with which funds can move between accounts adds complexity to determining the exact amount of money in circulation.

Financial assets held in different accounts may serve similar functions, blurring the boundaries of what should be counted as money. As a result, measuring the money supply involves deciding which types of assets to include. Some assets are more liquid, meaning they can be quickly used for payments, while others are less accessible but still play a role in financial decision-making.

Because money exists in different forms and can be used in many ways, it’s hard to measure exactly how much money is in the economy.

The quantity of money, also called the money supply, is the total amount of money available in an economy.

In a modern economy like the U.S., money exists in different forms and can be accessed in various ways.

Economists rank these assets by their liquidity- how easily they can be used to buy goods and services.

Consider Tom. He can use cash to buy groceries or swipe a debit card that draws from his checking account.

Tom can use his bank’s mobile app to pay his electricity bill, which allows him to pay from his checking account.

He has been thinking about buying a car. When the time comes, he knows he can move money from his savings account into his checking account.

And if Tom faces a medical emergency, he knows he can access funds from his money market deposit account.

With so many different assets being used together, it becomes harder to draw a clear line around what should count as “money.”

It depends on which types of assets we include when defining the money supply.