Determinants of Money Supply:
- The Required Reserve Ratio: The required reserve ratio (or the minimum cash reserve ratio or the reserve deposit ratio) is an important determinant of the money supply.
- The Level of Bank Reserves: The level of bank reserves is another determinant of the money supply. ...
- Public’s Desire to Hold Currency and Deposits: People’s desire to hold currency (or cash) relative to deposits in commercial banks also determines the money supply.
- High-Powered Money: The current practice is to explain the determinants of money supply in terms of the monetary base or high-powered money.
- Other Factors: Money supply is a function not only of the high-powered money determined by the monetary authorities, but of interest rates, income and other factors.
What are the factors that affect the money supply?
- The rate of interest on loans
- The number / value of monetary transactions that we expect to carry out
- The extent to which we also want to hold other financial assets, such as bonds, property, saving (this is also influenced by the rate of interest) – this is known ...
- Changes in GDP
What organization most affects the money supply?
Which of the following is primarily responsible for the control of the money supply? When the Federal Reserve buys government on the open market, what effect does this action have on the nation's money supply and aggregate demand? Nice work!
Who determines the money supply?
Which is the best indicator for day trading?
- Moving Averages. Moving averages is a frequently used intraday trading indicators.
- Bollinger Bands. Bollinger bands indicate the volatility in the market.
- Relative Strength Index (RSI) Relative Strength Index (RSI) is a momentum indicator.
- Commodity Channel Index.
- Stochastic Oscillator.
How to calculate money supply?
What is the Money Multiplier Formula?
- Examples of Money Multiplier Formula (With Excel Template) Let’s take an example to understand the calculation of the Money Multiplier in a better manner. ...
- Explanation. ...
- Relevance and Use of Money Multiplier Formula. ...
- Money Multiplier Formula Calculator. ...
What are the four types of money supply?
The 4 different types of money as classified by the economists are commercial money, fiduciary money, fiat money, commodity money.
What are the theories of money supply determination?
Theory of determination of money supply explains how a given supply of high-powered money (which is also called monetary base or reserve money) leads to multiple expansion in money supply through the working of money multiplier.
What are the main determinants of money demand and money supply?
In summary, the demands for money depends on the price level, the interest rate, and real gross domestic product. These three factors combine to determine the fraction of people's wealth that they hold as cash and checking for shopping, and the fraction that they hold as interest bearing assets.
What are the determinants of money supply in Nigeria?
From the literature reviewed, it is well understood that money supply is determined by a change in the base money or high-powered money, interest rate, money multiplier, liquidity and reserve ratios or real income and output.
What are the last two determinants of the money supply?
The last two determinants together are called the monetary base or high powered money. 1. The Required Reserve Ratio: The required reserve ratio (or the minimum cash reserve ratio or the reserve deposit ratio) is an important determinant of the money supply.
How is the money supply determined?
According to the first view, the money supply is determined exogenously by the central bank. The second view holds that the money supply is determined endogenously by changes in the economic activity which affect people’s desire to hold currency relative to deposits, the rate of interest, etc.
What is high powered money?
High-powered money is the sum of commercial bank reserves and currency (notes and coins) held by the public. High-powered money is the base for the expansion of bank deposits and creation of the money supply. The supply of money varies directly with changes in the monetary base, and inversely with the currency and reserve ratios.
How many measures of money supply are there in India?
There are four measures of money supply in India which are denoted by M 1, M 2, M 3, and M 4 .This classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to this till March 1968, RBI published only one measure of the money supply, M or M 1 defined as currency and demand deposits with the public.
Why is the money supply so large?
This is because banks can create more money with larger deposits.
How does money supply affect liquidity?
A change in the money supply affects liquidity by bringing changes or readjustments in the portfolio holdings of the assets of the people. This depends on the effect of money supply on aggregate spending. If people decide to spend the increased money supply in purchasing such assets as shares and debentures, there will be less money available in liquid form with the public. If the stock market is bullish, people may convert assets in their portfolios in buying more shares.
Which is the most liquid form of money in India?
Of the four measures of money supply in India, M l which consists of currency with the public and demand deposits with commercial and cooperative banks, is the most liquid form of money. Currency consists of notes, rupee coins, two rupee coins, five rupee coins and small coins, and cash on hand with banks, are the most liquid assets.
What is the theory of determination of money supply?
Theory of determination of money supply explains how a given supply of high-powered money (which is also called monetary base or reserve money) leads to multiple expansion in money supply through the working of money multiplier. We have seen above how a small increase in reserves of currency with the banks leads to a multiple expansion in demand deposits by the banks through the process of deposit multiplier and thus causes growth of money supply in the economy.
What are the two components of money supply?
According to the standard concept of money supply, it is composed of the following two elements: ADVERTISEMENTS: 1. Currency with the public , 2. Demand deposits with the public . Before explaining these two components of money supply two things must be noted with regard to the money supply in the economy.
Why are demand deposits considered money?
Obviously, they are money because they are used as a medium of exchange and are generally referred to as M 1.
Why are banks able to create multiple expansion of credit or demand deposits?
In fact, it is against these cash reserves (R) that banks are able to create a multiple expansion of credit or demand deposits due to which there is large expansion in money supply in the economy. The theory of determination of money supply is based on the supply of and demand for high- powered money.
Why are money reserves not used?
Since the Government and the banks produce or create money for the use by the public, the money (cash reserves) held by them are not used for transaction and speculative purposes and are excluded from the standard measures of money supply.
What is money supply?
First, the money supply refers to the total sum of money available to the public in the economy at a point of time. That is, money supply is a stock concept in sharp contrast to the national income which is a flow representing the value of goods and services produced per unit of time, usually taken as a year.
Why is money supply important?
Importance of Money Supply: Growth of money supply is an important factor not only for acceleration of the process of economic development but also for the achievement of price stability in the economy . There must be controlled expansion of money supply if the objective of development with stability is to be achieved.
How is the money supply determined?
This means that the money supply is determined not only by the monetary policy of the central bank, but also by the behaviour of households (which hold money) and of banks (in which money is held). In India, the money supply, in a narrow sense, includes both currency in the hands of the public and deposits at banks that households can use on demand ...
What are the two components of money supply?
It has two Inroad components: (1) currency in circulation, called primary money, and (2) bank (deposits) money, called secondary money.
What is high powered money?
High-powered Money: High-powered money or base money consists of currency in circulation (notes and coins) and banks’ reserves at the central bank. Currency in circulation consists of that part of currency held by the public. This is also known as legal tender money (fiat money).
What is the response of excess reserves to changes in credit conditions, which might be measured by interest rates, that gives the
The response of excess reserves to changes in credit conditions, which might be measured by interest rates, gives the money supply a positive elasticity with respect to the interest rate.
How does the central bank control the money supply?
The Central Bank’s Control over the Money Supply: The central bank controls the level of the money supply first by setting reserve requirements against deposits, and then by changing the amount of reserves it supplies, both on its own initiative and on the initiative of the member banks.
Why do banks make money?
Banks, especially commercial banks, create money due to the prevalence of fractional (proportional) reserve system. ADVERTISEMENTS: Since commercial banks keep only a portion (fraction) of their total deposits as reserves, they can lend the excess reserves which, in their turn, add to the country’s money supply.
What is M1 in banking?
M1: The most important concept of money is narrow (transactions) money or M 1, which is the sum of coins and paper currency in circulation outside the bank. Plus deposit withdrawable by cheques. Coins and paper currency are called fiat (legal tender) money. This means that the money supply is determined not only by the monetary policy ...
What are the main determinants of the supply of money?
Main determinants of the supply of money are (a) monetary base and (b) the money multiplier. These two broad determinants of money supply are, in turn, influenced by a number of other factors. Various factors influencing the money supply are discussed below:
What is the significance of the monetary base?
Monetary Base: Magnitude of the monetary base (B) is the significant determinant of the size of money supply. Money supply varies directly in relation to the changes in the monetary base. Monetary base refers to the supply of funds available for use either as cash or reserves of the central bank.
What is the difference between monetary base and money multiplier?
2. Money Multiplier: Money multiplier (m) has positive influence upon the money supply.
What are the negative effects of seasonal factors?
Seasonal Factors: Seasonal factors have negative effect on the money multiplier, and hence on the money stock. During holiday periods, the currency ratio (c) will tend to rise, thus, reducing the money multiplier and, thereby, the money supply. Brief notes on the Indian Currency System before World War II.
Does interest rate increase money supply?
Interest rate has a positive effect on the money multiplier and hence on the money supply. A rise in the interest rate will reduce the reserve ratio (r), which raises the money multiplier (m) and hence increases the money supply and vice versa.
Does real income increase the money multiplier?
Real income (Y) has a positive influence on the money multiplier and hence on the money supply. A r se in real income will tend to increase the money multiplier and thus the money supply and vice versa.