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Different definitions of money supply exist because various forms of money may be used to make payments. The monetary authorities in the United States recognize 4 different types: M1, M2, M3 and L (for liquidity). Supply of money is shown graphically as a vertical line because it is determined by forces exogenous to the money market; these forces are policy tools of monetary policy (which are studied in next two chapters).
Figure 10.2 Supply and Demand for Money
| Any asset which allows one to make a payment, qualifies as a form of money, and is, thus, part of money supply. Careful analysis reveals that many different assets qualify as money, and differ only in the time it takes to complete the desired payment: this is their liquidity. |
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