Which of the following statements regarding money is correct?

I. Money supply is a stock variable.

II. The total stock of money in circulation among the public at a particular point of time is called money supply. 

The correct answer is Both I and IIKey Points

•  Money supply is a stock variable.
  • This statement is correct because the money supply represents the total amount of money available in the economy at a specific point in time.
  • Stock variables are measured at a particular moment, distinguishing them from flow variables,
    • which are measured over a period of time (like income or expenditure).
• The total stock of money in circulation among the public at a particular point of time is called money supply.
  • This statement is also accurate.
  • The money supply includes all forms of money available to the public, such as cash, coins, and demand deposits, at a given time.
  • It reflects the liquidity in the economy.

Additional Information

• The money supply can be broken down into different categories, such as:
  • M0: This is the total of all physical currency (coins and notes) in circulation and is often referred to as "base money" or "monetary base."
  • M1: This includes M0 plus demand deposits (checking accounts) and other liquid assets that can quickly be converted into cash.
  • M2: This encompasses M1 plus savings accounts, time deposits, and other near-money assets that are less liquid than M1 components.
  • M3: This includes M2 plus larger time deposits, institutional money market funds, and other larger liquid assets.
• Central banks use tools like open market operations, discount rates, and reserve requirements to manage the money supply.
  • Open Market Operations: Buying or selling government bonds to increase or decrease the amount of money in circulation.
  • Discount Rate: The interest rate charged to commercial banks for loans received from the central bank's discount window.
  • Reserve Requirements: The minimum amount of reserves that banks must hold against deposits, affecting how much money banks can lend out.