Money Supply The Money Supply term refers to the total amount of money in particular country. The money supply is the sum of all paper currency (bills/banknotes), coins, and all deposits held with depository institutions (commercial banks, credit unions, etc.). Actually there are more than one ways to measure money supply depending on the definition of money. Obviously the cash (banknotes and coins) is money, but there are other financial instruments that are also considered money or at least close substitute for money. In fact the banknotes and coins in circulation usually represent a small part of the total amount of money in a country's economy. Money Supply in Canada The amount of money circulating in the Canadian economy is measured in several different ways, also known as money aggregates. The strictest money supply measure used in called is called M1, and it includes all banknotes and coins in circulation plus demand deposits held with commercial banks. The M1 measure frequently called “Narrow Money” is money that can be used in financial transactions directly. M1 contains only money that is currency or can be quickly turned into currency. M2 is a broader measure of money supply, which includes all money, included in M1 plus any deposits requiring a notice before withdrawal, personal savings accounts and term deposits. M2+ is even broader money aggregate including the money in M2 and adding money-market mutual funds, deposits at deposit-taking financial institutions, which are not banks, and annuities at life insurance companies. M2++ includes everything included in M2+ plus Canada Savings Bonds and all mutual funds. Controlling Money Supply in Canada In every fractional-reserve banking system such as the Canadian banking system, when a financial institution lends money to consumers or businesses, new money are created and this money enter the Canadian economy. In order to control the Canadian Money supply, the Bank of Canada influences the short-term interest rates, which in turn influence the loan interest rates offered by commercial Canadian banks to their clients. When the Bank of Canada decreases interest rates, this lowers the loan rates for consumers and businesses, giving them incentive to borrow more, thus increasing the money supply. When the interest rates are going up, people borrow less and strive to get out of debt (repaying their debts), which decreases the money supply.