Money may be regarded as something which is generally used as a means of payment and accepted for the settlement of debts. The term ‘supply of money’ means the total stock of money held by the public in spendable form.
The term ‘public’ refers to the individuals and the business firms in the economy, excluding the central government, the central bank and the commercial banks.
Thus, the cash balances held by the central government, the central bank and the commercial banks do not form money supply because they are not in actual circulation.
Money supply is a stock as well as a flow concept. When money supply is viewed at a point of time, it is a stock, and when viewed over a period of time, it is a flow. Money supply at a particular moment of time is the stock of money held by the public at a moment of time.
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It refers to the total currency notes, coins and demand deposits with the banks held by the public. Over a period of time, money supply becomes a flow concept.
It may be spent several times during a period of time. The average number of times a unit of money passing from one hand to another during a given period is called the velocity of circulation of money.
Thus, the flow of money supply over the period of time can be known by multiplying a given stock of money held by the public by the velocity of circulation of money.
In Fisher’s equation, PT = M V, M V refers to the flow of money supply over a period of time, where M stands for the stock of money held by the public and V for the velocity of circulation of money.