Money supply or money stock is defined as the total or aggregate amount of currency and liquid instruments (cash, coins, checking & savings account balances, and any other liquefiable assets) existing in a nation at a particular point of time.
The money supply statistics are important indicators of economic changes, such as inflation, general price levels, foreign exchange rate fluctuations, and the likely turn in business cycles. Therefore, they are often employed by market watchers to predict the investment and general business environment in a country. There are multiple measures of money supply that vary in the degree of liquidity, i.e. the ease with which the components can be monetized or converted into cash. Following are the five key measures:
M0 (M-Zero): The most liquid measure of an economy’s monetary resources at a point of time is called the M0 supply. This includes all the circulating cash + coins + instantly liquefiable assets with a Central Bank account. Being the smallest measure of the money supply, M0 supply is also known as narrow money.
M1 (M-One): The total amount of money within an economy that can be exchanged for goods or services is known as M1 supply. This includes cash, coins, checking or current account balance, and demand deposits (deposits that can be withdrawn on demand without requiring any prior notice or declaration). It can also be understood as M0 + checking/current accounts + demand deposits.
M2: An aggregate of the near money and the liquid assets is called M2 supply. In simplest terms, this includes M1 + the short-term deposits (also called as near money), which are easily convertible to cash + retail money market fund shares with more than 1-day maturity. This is the most commonly used variant of money supply.
M3: Emphasizing more on money as reserves or deposits, this is the broadest measure of supply and includes less liquid instruments, as well. We can say that M3 = M2 + the long-term deposits or financial instruments. Therefore, M3 also pertains to the financial institutions.
M4: This reflects the level of economic activity in a nation at a given point in time. M4 supply comprises of M3 + all other types of bank deposits.
As evident, the degree of liquidity decreases with the broadening of the supply measurement. However, it is important to note that not all countries follow the same definitions of types of money supply. In addition, there can be some additional measures and the classification in broad/narrow money may also vary.