The money supply is the entire stock of currency and other liquid instruments circulating in a country’s economy at a specific time. The circulating money involves the currency, printed notes, money in the deposit accounts, and the form of other liquid assets. In India, the Reserve Bank of India follows M0, M1, M2, M3, and M4 monetary aggregates which are respectively known as ‘Reserve Money’, ‘Narrow Money’, ‘Near Money’,’ Broad Money’, and ‘Broader Money’.(read: EXPLAINED: MONEY, MONEY SUPPLY AND MONEY SUPPLY CURVE)
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An increase in the money supply can have both positive and negative effects on the economy:
Positive effects
Lower interest rates: When the money supply increases, interest rates fall, which can encourage investment.
More money for consumers: When there’s more money in circulation, consumers feel wealthier and spend more.
Increased production: Businesses respond to increased sales by ordering more raw materials and increasing production
Economic growth: In the short term, an increase in the money supply can spur economic growth.
Negative effects
Inflation: If the money supply grows too quickly, it can lead to inflation. As the economy gets closer to full capacity, demand increases, which puts pressure on input costs like wages. Workers then use their increased income to buy more goods and services, which further increases prices and wages.
