The Concept Of Money Supply Essay

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2.1.13 The Concept of Money supply
According Layi (1999) money supply means the amount of money which is available in an economy in sufficiently liquid and spendable form. What constitute the components of this money supply depends on what has been officially accepted by monetary authorities of each country as the constituents of money supply for that country. Thus, each country‟s money supply definition may be unique. According to him the narrowest definition of money supply in modern time is currency plus demand deposit and this definition is known theoretically as M1.
M1 = C + DD
Where C is currency held by the public and not in commercial or merchant banks or currency in circulation less notes and coins in the vault of commercial and merchant banks and DD is demand deposit or current account deposit of the banking system net of federal government demand deposit. According to Layi (1999) economist have argued that there are more financial assets that perform the functions of money or that are sufficiently liquid to be accommodated within the definition of a country‟s money supply. To him one of these assets is Time deposit. Although they are for specific terms or may be subject to notice on withdrawal, they are not, in practical terms, difficult to convert into cash and this leads to M2 that is a wider definition of money and the components of which are:
M2 = C + DD +TD
Or
M2 = M1 + TD (since M1 = C + DD)
According to Layi (1999) C and DD as definition of money while TD…

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