Measuring the Money Supply and Essay

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Nonetheless, M2 when adjusted for changes in the price level, is still a component of the Index of Leading Indicators, and some market analysts use it to forecast economic recessions and recoveries (Federal Reserve Bank, 2008).

Measuring the money supply is not without controversy. The policy of manipulating the money supply in order to control inflation is based on the idea that the more money there is in circulation, the more money there is chasing fewer goods, resulting in higher prices and vice versa. Governments have the ability to control the amount of money in circulation. They do this by stimulating demand by printing more money or by reducing demand by removing money. The process of achieving specific targets is difficult and governments frequently miss their goals, resulting in recessions and booms, all of which make up the economic cycle (Benson, 2007).

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Skeptics in the financial markets maintain that the Fed stopped publishing information on M3 not because it was no longer useful, but for other reasons instead. Some analysts argue that by no longer reporting the total amount of money in circulation, the Fed is able to hide a huge amount of money creation, which is then used to fund the U.S. trade deficit (Benson, 2007).

As this discussion shows, the total money supply available in a given economy is difficult to determine, because of various ways of defining money and different ways of measuring it.

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