Functions of Money Supply

What are Money Supply Functions-Frequently Asked Questions-Functions of Money Supply

“Money supply” refers to the total amount of cash in circulation in a country, including bank accounts that can be used to write checks. In almost all countries around the world, the government or central bank decides how much money is printed. These companies add to the total amount of money in the economy, which makes the economy more flexible. This topic outlines functions of money supply which will assist you to achieve desired goals in your life.

The “money supply” is the total amount of cash (banknotes, coins, and demand accounts) that the general public has access to at any given time.

Functions of Money Supply

Money is both a way to buy and sell things and a place to keep value. Using widely accepted currency enables setting uniform prices for goods and services across diverse locations. This makes it easy to keep track of deals and figure out how much something is worth. The functions of money supply is as follows:


Since we believe that the actions of the central bank are the only thing that affects how much money is in circulation in an economy, it is much easier to define the money supply. It doesn’t need a function because it is independent of the variable that represents the interest rate and the other group variables.

Movement of Value

The worth of money is based on how useful it is as a means of exchange both inside and outside of a country’s borders. As the global way to buy and sell things, money makes it possible to buy and sell things on any market in the world. Because of this, the availability of money has grown, which is one of the most important things that money markets do. This has made the market more liquid and stable.

Trading Tool

Bartering is the only real alternative to money that can really fight with it. But in today’s world, trading goods and services is not only unlikely, but also not very useful. The bread seller for the green grocer may refuse onions and carrots if he dislikes or already has plenty, preferring alternative payment.

Because of this, most people agree that money can use as a way to trade goods and services. When I go to the food store, I know that the cashier will take my money without asking any more questions. The U.S. government stamps its money with the words “This note is legal tender for all debts, public and private.” To put it another way, the United States government agrees that it is legal for me to pay with dollars.

Compensation Future

Having money empowers people to promptly address delayed bills that still require attention. It is now the standard for all financial activities, both now and in the future. When someone borrows money, the lender expects repayment of both the principal and interest. With no financial constraints, meeting deferred payments is effortless. This has made it much easier for banks to grow and has increased the demand for a wide range of loan and lending operations.

Measurement Base Unit

Money can use as a unit of account, which is one thing that makes it unique. So, money is a way to exchange goods and services and keep track of the value of goods and services made in a country over a certain amount of time. Gross national product (GNP) is the market value of all of a country’s final goods and services created in a certain accounting year. J. R. Hicks says that the value of a country’s gross national product is the sum of the costs on the market for all of the finished goods and services in the economy.

Money is, in a way, the standard by which all other financial activities are judged and compared. You might get the money you need for a new computer in the form of t-shirts, bikes, or even corn. At the price of corn right now, a new computer could cost between 100 and 150 bushels. It’s simpler if prices are expressed in universally understood money, a common unit of value.

Value Quantifier

When using the barter method, it may be hard to figure out how much each item is worth. A horse is worth as much as five cows or 100 quintals of maize. A Maruti, on the other hand, is worth as much as ten two-wheeled cars. One of the problems with bartering is that different things have different trade values. Money, a universal unit, describes the value of all market transactions, representing what is bought and sold. This includes both the goods and services. A universal price unit simplifies trade and enhances cost transparency, providing a clearer understanding of the value of goods and services.

Wealth as Power

As services perish and goods spoil, society requires improved means to preserve value, emphasizing the need for robust financial systems. Money facilitates trade by preserving value for future use and enabling transactions, as long as inflation remains manageable.

Safe haven

Cash alternatives like wheat or salt depreciate, posing issues due to declining value over time, unlike stable currencies. Because of this, they are not an especially good way to save money. Think about a farmer as an example of someone who would have a hard time saving money in a swap system. He planned to save for later use some of the wheat from each of the seven days of the week.

But by the time he could have retired, all of his “savings” would have been used up. Saving $25 today ensures its value remains constant tomorrow, next week, and next year, unaffected by inflation or depreciation. Storing cash is safer than perishable items like corn, as cash doesn’t spoil or deteriorate over time. Even though money is a good way to store value, it is not perfect. Because of inflation, the buying power of money goes down over time.


The equilibrium interest rate is where real money supply and demand are perfectly balanced in the financial market. In the figure below, the functions of the money supply and the desire for money are shown side by side. This shows how the equilibrium reach.


Money demand function gauges how macro factors influence aggregate demand for money, aiding comprehension of monetary dynamics. Real GDP and price levels significantly influence transactional desires based on the discussed insights. Due to speculation, the average interest rate will have a negative relationship with the amount of money that people want.


What are the Benefits of Controlling the Money Supply?

The central bank maintains economic stability by regulating the circulating money supply in a country. Central banks control the amount of money in circulation in many different ways. Methods include adjusting interest rates, injecting new money, and mandating banks to maintain specific cash reserves.

The Government’s Method for Decreasing the Money Supply

By changing the interest rates on short-term loans, the Federal Reserve can also change the amount of money in circulation. The Fed adjusts rates to control money supply, impacting the funds available by changing interest rates for private banks.

How do Economists Gauge the Size of the Money Supply?

Monetary base, M1, and M2 are key metrics for gauging the available money supply in various ways. Banks’ reserves, including deposits with the Federal Reserve, constitute a crucial component of the monetary base.


A country’s medium of exchange will always be its legal currency. In economic crises, countries may switch currencies to stabilize value, as recessions weaken purchasing power, hindering transactions and spending. Summing up, this topic related to functions of money supply is crucial for the success of any organization. Read on types of money supply to learn the whole story, it says.

Scroll to Top