Republic of the Philippines

PANGASINAN STATE UNIVERSITY

Lingayen, Pangasinan
COLLEGE OF EDUCATION
2nd Semester 2019-2020

WRITTEN REPORT

Name : AGUADO, SHEILA MAE V.

Course Title : Macroeconomics
Topic : Measuring and Determining Money Supply
Instructor : Leandro A. Fernandez Jr.
Year&Section : II-BSE – SOCIAL STUDIES

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MEASURING AND DETERMINING MONEY SUPPLY

1. What is Money?

Money can be defined as any medium which facilitates the exchange of goods and
services between people. Exchange has taken on different forms throughout history,
starting with the barter system in the earliest centuries, where commodities were
directly exchanged for each other until the modern face of money today.

2. Functions of Money

• Medium of Exchange

As a medium of exchange, the item must be readily accepted as payment for goods
purchased or services rendered.

• Store of value

As a store of value, money allows individuals to save a portion of their present income
for consumption in the future.

• Unit of Account

Defining money as a unit of account means that the value of assets and commodities is
given in terms of money.

3. Features of Money

For an object to serve efficiently as money, it should possess the following features:

√ It must be widely accepted as a means of payment.

√ It must be divisible.
√ It must be easily identified.

√ It must not be easily duplicated or counterfeited.

√ It must be easily transported.

√ It must be durable, allowing it to last for very long periods.

4. Money Supply

Money supply is defined as the total quantity of money circulating in the economy at a
particular time. Many countries commonly use it as an indicator of economic
performance. However, money is not only limited to cash anymore. There are several
other physical and intangible assets that perform the functions of money. Thus, money
supply can be larger or smaller. And most countries determine atleast three measures
of money supply, M1, M2 and M3. We will look into at each of them in more detail.

Note: Liquidity refers to the ease with which an asset, or security, can be converted into
ready cash for a short period of time.

5. Measuring and Determining Money Supply

M1

M1 includes all currency in circulation, traveler's check, demand deposits at commercial

banks held by the public and other checkable deposits. It is often referred to as the
narrowest measure of money supply or narrow money.

The money in M1 functions as a medium of exchange.

For example, When I deposit money into my checking account, this is part of M1. I can
withdraw my money at any time and use it to buy stuff. Therefore M1 is the most liquid
because it can be easily converted into cash.

M2

M2 includes everything in M1 as well as savings deposits, small time deposits and

balances in retail money market funds. It is often referred to as an intermediate
measure because it is broader than M1 but not quite as broad as M3.

The money in M2 functions as a store of value.

For example, when I again, store 100 000 pesos into my savings account, I am already
using the money as a store of value. This money will earn interest in the long run.
Therefore M2 is less liquid than M1 yet more liquid than M3 because it takes longer
time to convert it into cash.

M3
M3 includes everything in M2, balances in institutional money market funds, term
repurchased agreements, eurodollars and large time deposits. It is considered as the
broadest measure of money supply. However, some countries like India includes M4.

The money in M3 functions as unit of account.

This money is beyond our capacity because its already in the hands of federal reserves
and larger institutional money market. Therefore M3 is the least liquid because it can't
be easily converted into cash, it takes many long steps.

Finally...

The behaviour of monetary aggregates is critical to the maintenance of economic

stability. Whereas an expansion in the money supply facilitates economic growth,
excessive increases in the rate of growth of money supply have an adverse effect on the
price level and the level of income in an economy. This calls for close monitoring of the
movement in money supply by the monetary authorities. Despite variations in the
measurement of money supply, it is important that consistency be maintained.

Consistency is the key!

References

A. Online Documents

Chappelow, J. (June 25, 2019). Money supply definition. Retrieved on March 21, 2020,
from https://www.investopedia.com/terms/m/moneysupply.asp

Singh, J. Money supply: Meaning and measures of money supply. Retrieved on March
21, 2020, from http://www.economicsdiscussion.net/money/money-supply-meaning-
and-measures-of-money-supply/599

Nash, J. Measuring the money supply: Explanations and examples. Retrieved on March
21, 2020, from https://study.com/academy/lesson/measuring-the-money-supply-
explanation-and-examples.html