Money is the generic name given to the legal tender (legal entities used to pay for goods and services) of a given space. Money supply is in essence the amount of money available to meet the demand of money. This demand occurs primarily in markets and charitable spaces (spaces that request free giving of money). In modern times, humans have integrated the concepts of markets, money, banking and investing in order to establish a modern infrastructure for money supply. Money supply is strictly defined as the amount of cash (currency and coins) in circulation, travelers' checks and demand deposits (checking accounts) in banks. A broader definition includes savings accounts and government securities such as saving bonds and treasury notes. The concept of money supply expresses all of the Pj problems.
The markets and other money spaces involved in the money demand-supply interactions are well defined spaces (real or virtual) that contain various entities. This containership made the establishment of the money supply infrastructure possible.
The above diagram (the pentagonization of the money space) identifies the primary members of the money-supply space. These members also constitute the money-demand space. The money-demand space and the money-supply together constitute the money space.
Monetary policy and fiscal policy are the primary forces that act on money supply. Fiscal policy is implemented by the government of a nation while monetary policy is implemented by a nation's central bank (federal reserve bank in the US). The actions of these forces are intended to increase or decrease money supply. For example, the central bank increases or decreases money supply by increasing or decreasing the interest (discount rate) it charges banks, and the amount of reserves it requires from the banks. A low discount rate increases money supply. A high discount rate decreases money supply. Low reserves increase money supply. High reserves decrease money supply. An example of a fiscal policy is a tax policy. Cutting or raising taxes affect money supply. The effect of taxes on money supply depends on the decisions of the beneficiaries of the tax policy. For example, money supply in the context of its strict definition is not immediately increased if the businesses and individuals that benefit from the tax cut save the extra money and their banks do not return the money into circulation in the form of loans. Similarly, how the government uses the proceeds from a tax increase will determine if money supply is increased.
The above diagram illustrates the flow of money in the money-supply space. The movement of money occurs primarily in the MarketPlace between buyers and sellers. All members indicated in the diagram are buyers and sellers. The buying and selling in the marketplace establishes the flow of money in the money-supply space.
Money supply changes in response to the forces that act on its space. As previously mentioned, specific monetary and fiscal policies increase or decrease money supply. Liquidation of investments increase money supply when the strict definition of money supply is applicable. Changes in money supply can bring about other changes in an economy. For example, an increase in money supply may increase investments which may increase employment which may increase demand which may increase supply which may further increase demand which may overpower supply which may result in the rise of prices of goods and services (inflation). A decrease in money supply may reverse the preceeding change sequence and increase the probability of unemployment which may result in a recession (7% or more of the work force unemployed).
There are various groups in the money-supply space: groupings with respect to types of markets and with respect to types of money. The interactions are many.
Money demand-money supply equilibrium that simultaneously contain inflation and unemployment within acceptable range, is the equilibrium desired in the money-supply space. Monetary and fiscal policies are adjusted as needed in order to realize this equilibrium.
Consequently, money supply is an expression of Pj Problems