In economics, money supply is defined as the amount of money in the economy, measured according to varying methods or principles. One such method incorporates only money that is usually used to purchase goods and services, such as cash and the contents of checking accounts. There are several measures for the money supply such as M0, M1 and M2.
The First measure, M0, generally comprises of the money in the hand of the general public, the statutory deposits of the banks held by the central bank and its cash reserves. This M0 is often referred to as the monetary base of the economy. The next measure, M1, includes M0 and in addition to it, the foreign currency deposits which are needed in domestic transactions.
Further on, M2 includes both M0 and M1 combined and in addition takes in account the short term savings, deposit certificates, transferable foreign currency deposits and repurchase agreements.
In an economy, these three measures, M0, M1 and M2 are often considered as the primary components of the money supply circulating in the economy. However, apart from these there could be cases where broader measurements maybe required. This might be true when the case deals with less liquid asset and this is where the M3 and M4 components come in.
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