Money supply

Governments measure the money supply in their countries ___ 1 ___ information about ___ 2 ___ in aggregate demand, the state of financial market and the need for and ___ 3 ___ of monetary policy.

Measuring the money supply is not as easy as it might first appear. This is because it is difficult to decide what to include in any measure of money. Economists define ___ 4 ___ as money if they ___ 5 ___ the functions of money. However, ___ 6 ___ to which items carry out these functions varies and can change over time. As a result, governments use a variety of measures of the money supply which are occasionally altered to reflect developments in ___ 7 ___ carried out by particular items.

The measures of the money supply can be divided into narrow and broad measures. Narrow measures focus on items which are used primarily as a means of exchange, whereas broad measures include items which are used not only as a means of exchange but also as a store of value.

In the UK the measure of narrow money is M0. This consists of notes and coins and banker’s deposits with the Bank of England. These deposits are used by banks ___ 8 ___ debts between each other and ___ 9 ___ cash when needed. M0 is sometimes referred to as the monetary base or high-powered money.

M4 is the UK’s broad measure. This includes notes and coins and bank and building society deposits.