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The supply of money means the total stock of money (paper notes, coins and demand deposits of bank) in circulation which is held by the public at any particular point of time.
Briefly money supply is the stock of money in circulation on a specific day. Thus two components of money supply are :
(i) currency (Paper notes and coins)
(ii) Demand deposits of commercial banks
In the real world, money supply has different definitions: M1 and M2. Money is categorized according to its liquidity. The most liquid items are in M1.
M1: includes currency (coins minted by the U.S. Treasury and paper currency issued by the Federal Reserve), checkable deposits and traveler’s checks (issued by the commercial banks and thrift institutions).
Currency and checkable deposits belonging to the federal government, Federal Reserve, or other financial institutions are not included in M1.
M1 = Currency + Checkable deposits + Traveler’s checks
M2: includes all of the components of M1 plus near-moneys which includes items like:
a) Small Time deposits: interest-earning deposits with a value of less than $100,000, and having a specified maturity.
b) Savings deposits: interest-earning deposits with no specific maturity of maximum value.
c) Money market accounts: savings that invest in short-term financial instruments, pay higher than savings account interest.
d) Overnight repurchase agreements: agreements by a financial institutions to sell short –term securities to its customers, accompanied by an agreement to repurchase the securities within 24 hours.
e) Overnight Eurodollar deposits: 24-hour dollar-denominated deposits held in financial institutions outside the United States.
M2 = M1 + all near moneys (Such as Small time deposits, Savings deposits, Money market accounts, overnight repurchase agreements, overnight Eurodollar deposits).
