Use the money supply calculator to determine various standard measures of the US money supply, most prominently:

  • M0 money supply (M1 money stock FED);
  • M1 money supply;
  • M2 money supply;
  • M3 money supply.

In addition, we explain the relationship between money supply and inflation, and we also cover multiple interesting points on this topic, for example:

  • How to calculate the money supply with reserve ratio;
  • How to calculate the change in money supply;
  • What is the money supply definition;
  • How does banking affect the money supply; and
  • Why does an increase in money supply decrease interest rates.

If you would like to calculate money supply with a money multiplier, check our multiplier calculator.

What is money supply?

In macroeconomics, the money supply refers to the total stock of money present in a given economy at a particular time. While the exact money supply definition varies depending on the purpose of the assessment and the central bank of the given country, its standard measures typically embrace currency in circulation and different types of demand deposits.

Components of the money supply calculator

The present calculator reflects the U.S. money supply measures determined by the Federal Reserve with default approximated values in 2020. It includes the following categories.

Note that the different money supply measures are ranked according to their liquidity levels.

  • M0: The total of all physical currency, including coinage.
    M0 = Federal Reserve Notes + US Notes + Coins

  • Monetary Base: the total of all physical currency plus Federal Reserve Deposits.
    MB = M0 + Federal Reserve Deposits

  • M1: the M1 money supply is composed of the following elements:
    M1 = M0 + Demand deposits + Travelers checks + Checkable deposits + Savings account
    Note that the money supply M1 does not include the currency held by the U.S. Treasury.

  • M2:
    M2 = M1 + Money market accounts + Retail money market mutual funds + Time deposits (CDs) under $100,000

  • MZM (Money Zero Maturity) - advanced mode:
    MZM = M2 - time deposits + money market funds

  • M3 - advanced mode:
    M3 = M2 + Time deposits (CDs) above $100,000

  • M4 - advanced mode:
    M4-= M3 + Commercial Paper
    M4= M4- + T-Bills

How does banking affect the money supply? - Money creation in the modern economy

Since lending is an essential feature of market economy, banks play a central role in economic growth. When banks lend money, they create a deposit (liability for the bank, asset for the borrower) matching with the value of the loan (asset for the bank, liability for the borrower). Therefore, as opposed to the textbook-like mechanism, in essence, banks do not lend out the money (savings) deposited, but bank lending creates a deposit. Of course, banks can't create money without a limit. There are multiple constraints binding on banks' activity:

  • Profitability in the competitive banking system;
  • Prudential regulations to keep banks resilient (i.e., capital ratios, Basel);
  • Behavior of the private sector (i.e., the money supply decreases when we repay loans); and
  • Monetary policy interventions (i.e., rising interest rates).

If you are interested, you may watch this report, where a representative of the Bank of England explains the process of money creation and the mechanism of quantitative easing.

How to calculate the money supply increase with reserve ratio?

You need to take the following steps to calculate the change in money supply if the reserve ratio is, let's say, 10 percent.

  1. Determine the money multiplier by dividing one by the reserve ratio, which is the percentage of deposits that the central bank requires a bank to keep either as cash in their vaults or as deposits with a Federal Reserve Bank - (1 / 0.1 = 10).

  2. Find out the change in reserves. For example, the Federal Reserve injects $1,000,000 into the economy through open market operation (i.e., selling $100,000 worth of US government bonds).

  3. Estimate the maximum change in money supply by multiplying the change in reserves by the money multiplier.
    Money Supply Change = Change in Reserves * Money Multiplier = $100,000 * 10 = $1,000,000

Note that the above money supply formula does not necessarily hold. First, many economists argue that money creation in the modern economy happens prominently through loan creation, independently from depositing money. Second, lending activity may not operate on its upper limit due to supply/demand factors and financial frictions.

Indeed, reserve ratios worldwide dropped to a very low level after the Great Recession (around 1 percent) without increasing the money supply proportionally, which is another evidence of non-linearity between the money supply and the reserve ratio.

Can an increase in the money supply affect aggregate demand?

Yes. If, for example, commercial banks and the private sector respond to an expansionary monetary policy (i.e., lower policy interest rates) with increased loan activity, an increase in the money supply will boost investment and aggregate demand and thus the GDP growth. It is worth noting that if the real economy cannot keep pace with the increase in the money supply and the higher aggregate demand (i.e., negative GDP gap), inflation may rise. An extreme form of money supply and inflation relation is the phenomenon of hyperinflation, which occurs at the time of massive money injection (money printing) with incapable economic production and high aggregate demand.

FAQ

How can the Federal Reserve decrease money supply?

The Federal Reserve may decrease money supply through increasing reserve ratio and open market operation (i.e., selling US government bonds) or slowing down lending activity through increasing policy rates.

How does the FED increase the money supply?

The Federal Reserve may increase the money supply by reducing reserve ratio and expansionary open market operation (i.e., buying US government bonds from the market) or stimulating lending activity through decreasing policy rates.

How can I calculate the Monetary Base in the US economy?

Follow the below steps to determine the US economy's monetary base (MB).

  1. Collect the data of Federal Reserve Notes, US Notes and coins;
  2. Determine M0 by summing up the three elements.
  3. Compute the monetary base by adding the Federal Reserve Deposits to M0 (MB = M0 + Federal Reserve Deposits).

Why does an increase in money supply decrease interest rates?

On the one hand, the Federal Reserve may increase the money supply by lowering policy rates, which push down lending rates. On the other hand, the increased money supply means wider availability of money that reduces the price of the money in the form of lower lending rates (law of supply).

Tibor Pal, PhD candidate
M0
Notes in circulation
$
million
Coins
$
million
M0
$
million
Monetary Base (MB)
Federal Reserve Deposits
$
million
Monetary Base
$
million
M1
Demand deposit
$
million
Travelers checks
$
million
Checkable deposits
$
million
Savings accounts
$
million
M1
$
million
M2
Money market mutual funds
$
million
Time deposits under $100,000
$
million
M2
$
million
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