The money supply is total amount of money existing in an economy at particular time. There are quite a few means to describe money but standard definition include “currency in circulation and demand deposits”. The central bank of each country has its own definition of money supply according to its purpose.
The record of money supply is documented and published by the central bank or government of the country. The private and public sector expert’s observer change in money supply for the reason that such modification affect the exchange rate, inflation, price level, interest rate and business cycles.
The money supply in any country has direct impact on its economy. There is direct relationship between economic growth, price level and money supply. A reasonable extent of money supply in economy lower the rate of interest which in turn produce more investment and places more money in the hands of consumer. It raises the business production and demand for labor, which in turn creates employment opportunities.
A rapid rise in money supply may negatively affect the country economy. A country such as Zimbabwe, a rapid and extremely increase in money supply result in rapid increase in price of goods and services (hyperinflation). This is the reason for moderate supply of money.
There are main three measures of money supply according to the size and type of money, classified as M1, M2 and M3. The M1 also called narrow money which include all coins, notes and other money alike that can be changed simply to cash. M2 include M1 money and short term deposits in money market funds and banks. M3 include M2 money and long term deposits.