Why are there more elements to the money supply than just the money that is actively circulating?

1 answer:

6 0

The money that is actively circulating is specifically identified as CASH. It is a part of the money supply.

Basic money supply are all the cash held by the public either on hand or in their transaction accounts like savings or checking accounts. These are all money because they have the ability to purchase goods and services aside from cash exchanges.

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A receipt of cash indicates an increase in cash which is an asset. When an asset increases, it is represented by a debit to that asset's account and the asset side of the accounting equation is also debited. Thus, a receipt of $12000 cash from stockholders will be represented by a debit or an increase to the asset account for $12000.

The other side of the transaction would be a credit to the equity for $12000 because the stockholders are the owners of the company and any capital invested by the owners in the company is represented by a credit to the equity account as the capital is credited when it increases. Thus, the effect on accounting equation will be an increase in the equity of $12000.

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