Economic: Money Supply

March 3, 2022

The money supply is the total amount of currency and other liquid assets in a country’s economy on a given date. Cash and deposits that can be utilized virtually as quickly as cash are roughly included in the money supply.

Governments print money and mint coins using a combination of central banks and treasuries. Bank regulators have an impact on the money supply available to the public by imposing reserve requirements on banks, determining how to grant credit, and other money-related issues.

Economists study the money supply and devise policies based on it, such as managing interest rates and increasing or lowering the amount of money in circulation. Because of the potential effects of the money supply on price levels, inflation, and the business cycle, public and private sector study is conducted. 

The Federal Reserve’s policy is the most important deciding factor in the money supply in the United States. The money supply, often known as the money stock, is a measure of the amount of money in circulation.

Money Supply’s Impact on the Economy

A rise in the money supply often lowers interest rates, which stimulates spending by generating more investment and putting more money in the hands of consumers. Businesses respond by expanding production and ordering more raw materials. 

The need for labor rises as company activity rises. If the money supply or its growth rate lowers, the opposite can happen.

The money supply has long been thought to be an important element in determining macroeconomic performance and business cycles. Irving Fisher’s Quantity Theory of Money, Monetarism, and Austrian Business Cycle Theory are macroeconomic schools of thought that place a strong emphasis on the significance of money supply.

How Is the Money Supply Measured?

According to the type and size of the account in which the instrument is maintained, the various forms of money in the money supply are commonly categorized as Ms, such as M0, M1, M2, and M3. Not all of the classifications are frequently used, and different classifications may be used in different countries. 

The money supply indicates the many types of liquidity available in the economy for each type of money.

M1, for example, is also known as narrow money and contains in circulation coins and notes, as well as other money equivalents that may be quickly converted to cash. M2 encompasses M1 as well as short-term time deposits in banks and certain money market funds.2 M3 encompasses M2 as well as long-term deposits. 

The Banko Sentral ng Pilipinas, on the other hand, no longer includes M3 in its reports.

What Happens if the BSP Sets Money Supply Limits?

The money supply of a country has a big impact on its macroeconomic profile, especially when it comes to interest rates, inflation, and the business cycle. The BSP is in charge of determining the level of monetary supply in the Philippines. 

Interest rates rise and borrowing costs rise when the Fed restricts the money supply through contractionary or hawkish monetary policy. This may reduce inflationary pressures, but it also has the potential to hinder economic growth.

What Factors Affect Money Supply?

A country’s money supply is regulated by its central bank. A central bank can use monetary policy to pursue either an expansionary or contractionary strategy. 

Expansionary policies involve measures such as open market operations, in which the central bank purchases short-term Treasuries with newly produced money, therefore pumping money into circulation. 

A contractionary strategy, on the other hand, would involve selling Treasuries and withdrawing money from circulation.

Money Supply Update in the Philippines

Despite a modest increase in March, the country’s money supply growth remained consistent with the needs of the growing economy, according to the Bangko Sentral ng Pilipinas (BSP).

Domestic liquidity, as measured by M3, increased 14.4% to P10.9 trillion in March this year, according to BSP data. Its rate of increase accelerated from the previous month’s 13.5 percent increase.

M3 is the most comprehensive measure of a country’s money supply. It is used by economists to assess the whole money supply and by governments to direct policy and manage inflation.

Concerns about the Philippine economy overheating were aroused by the acceleration of cash supply growth, as well as the rising inflation tendency.

A growing cash supply is typically advantageous to an expanding economy, such as the Philippines’, because it fuels the country’s productive sectors.

However, excessively rapid M3 expansion could exacerbate inflationary pressures and push prices higher. M3 growth that is unbalanced is also a sign that the economy is potentially overheating.

As a result, the BSP swiftly reassured the public that the general speed of M3 was “compatible with the BSP’s current inflation and economic activity expectations.” “However, the BSP will continue to closely monitor domestic liquidity to ensure that monetary circumstances are conducive to preserving price and financial stability,” according to the BSP.

The substantial expansion in M3 was attributed by the Central Bank to continued strong bank lending over the period. However, preliminary statistics showed that commercial bank outstanding loans grew at a slower rate of 18.3 percent in March, compared to 19.5 percent in February.

Production loans, which accounted for 88.4 percent of the banks’ total loan portfolio, increased to 18.1 percent from 18.6 percent the previous month.


Money has a significant impact on economic activity since it is employed in almost all economic transactions. A rise in the money supply stimulates expenditure by lowering borrowing rates, which encourages investment, and by placing more money in the hands of consumers, making them feel wealthier. 

Increased revenues prompt companies to order additional raw materials and boost production. The spread of company activity boosts labor demand while also boosting capital goods demand. 

Stock market prices rise in a growing economy, and companies issue equity and debt. Prices begin to rise as the money supply expands, especially if output growth meets capacity constraints.

As the public expects inflation, lenders demand higher interest rates to compensate for the loss of buying power predicted during the life of their loans. When the money supply or the pace of growth of money diminishes, opposite effects emerge. 

As a result of the drop in economic activity, either disinflation (lower inflation) or deflation (lower prices) occurs.