The document discusses concepts related to measuring money supply and determining money supply. It defines several monetary aggregates (M1-M4, NM0-NM3, L1-L3) used in India to measure money supply. It then presents a general model of money creation where money supply is determined by the monetary base, currency to deposit ratio, required reserve ratio, and excess reserve ratio. Changes in these determinants by the central bank, commercial banks, or public can impact money supply. The document also discusses exogenous and endogenous views of how the money supply curve may be shaped.
Chapter 6- moneytary policy and its management for BBAginish9841502661
Monetary policy and its management discusses key concepts related to monetary policy including money supply, factors affecting money supply, objectives of monetary policy, and instruments of monetary policy. Money supply is composed of currency in circulation and bank deposits available for spending. Factors that influence money supply include net foreign assets, net domestic assets, and reserve money. The main objectives of monetary policy are price stability, full employment, and economic growth. Central banks use instruments like bank rates, reserve requirements, and open market operations to tighten or loosen monetary policy and influence money supply.
Bba 2 be ii u 2.2 demand and supplyofmoneyRai University
This document discusses the concepts of money and inflation. It defines money, explores its functions and determinants of money supply. Money supply is measured using various approaches like M0, M1, M2, M3, and M4. The document also examines the demand for money based on the transaction motive, precautionary motive, and speculative motive in Keynes' liquidity preference theory. It discusses the causes of inflation including increases in money supply, decreases in goods supply, changes in demand for money and goods. Inflation is calculated using the wholesale price index and consumer price index. The main types of inflation are defined as demand-pull and cost-push inflation.
This document defines money and discusses its functions and determinants of money supply. It defines money as anything widely accepted as payment or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, unit of account, store of value, and deferred payment. The money supply is determined by the monetary base (cash and reserves) and the money multiplier, and includes different components like currency, demand deposits, savings deposits, and time deposits. The velocity of circulation and liquidity preferences also impact the money supply. The demand for money stems from its use in transactions, as a precautionary asset, and for speculative purposes.
Money was not used in early history as exchanges were done through bartering. Definitions of money include anything widely accepted for payments or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, store of value, unit of account, and deferred payment. The money supply is the total amount of money available in an economy and is composed of currency and demand deposits. It is determined by the monetary base and money multiplier. Money supply measurements include M0, M1, M2, M3, and M4. Inflation is a sustained increase in the general price level and can be caused by an increase in the money supply, decrease in goods supply
The document discusses how fractional-reserve banking allows banks to create money through the money multiplier effect. It provides scenarios to illustrate this, showing how an original $1000 deposit can expand the money supply to $5000 through loans made by multiple banks. It also covers theories of money demand, how the Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply, and reasons why the Fed cannot precisely control the money supply.
Money takes the form of either commodity money (with intrinsic value like gold) or fiat money (without intrinsic value established by government decree). Money serves three functions as a medium of exchange, unit of account, and store of value. The money supply includes M1 (currency and checkable deposits) and broader M2 (M1 plus savings deposits and money market funds). When the central bank increases reserves, the banking system can expand deposits by making loans, multiplying the initial change in reserves through the deposit multiplier.
The document discusses the monetary system in India. It defines money and its functions. It explains the different measures of money supply in India and the role of the Reserve Bank of India in managing the monetary system. It discusses how banks create money through fractional-reserve banking and the money multiplier effect. It also outlines the instruments used by RBI to control money supply such as bank rate, CRR, SLR etc.
Chapter 6- moneytary policy and its management for BBAginish9841502661
Monetary policy and its management discusses key concepts related to monetary policy including money supply, factors affecting money supply, objectives of monetary policy, and instruments of monetary policy. Money supply is composed of currency in circulation and bank deposits available for spending. Factors that influence money supply include net foreign assets, net domestic assets, and reserve money. The main objectives of monetary policy are price stability, full employment, and economic growth. Central banks use instruments like bank rates, reserve requirements, and open market operations to tighten or loosen monetary policy and influence money supply.
Bba 2 be ii u 2.2 demand and supplyofmoneyRai University
This document discusses the concepts of money and inflation. It defines money, explores its functions and determinants of money supply. Money supply is measured using various approaches like M0, M1, M2, M3, and M4. The document also examines the demand for money based on the transaction motive, precautionary motive, and speculative motive in Keynes' liquidity preference theory. It discusses the causes of inflation including increases in money supply, decreases in goods supply, changes in demand for money and goods. Inflation is calculated using the wholesale price index and consumer price index. The main types of inflation are defined as demand-pull and cost-push inflation.
This document defines money and discusses its functions and determinants of money supply. It defines money as anything widely accepted as payment or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, unit of account, store of value, and deferred payment. The money supply is determined by the monetary base (cash and reserves) and the money multiplier, and includes different components like currency, demand deposits, savings deposits, and time deposits. The velocity of circulation and liquidity preferences also impact the money supply. The demand for money stems from its use in transactions, as a precautionary asset, and for speculative purposes.
Money was not used in early history as exchanges were done through bartering. Definitions of money include anything widely accepted for payments or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, store of value, unit of account, and deferred payment. The money supply is the total amount of money available in an economy and is composed of currency and demand deposits. It is determined by the monetary base and money multiplier. Money supply measurements include M0, M1, M2, M3, and M4. Inflation is a sustained increase in the general price level and can be caused by an increase in the money supply, decrease in goods supply
The document discusses how fractional-reserve banking allows banks to create money through the money multiplier effect. It provides scenarios to illustrate this, showing how an original $1000 deposit can expand the money supply to $5000 through loans made by multiple banks. It also covers theories of money demand, how the Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply, and reasons why the Fed cannot precisely control the money supply.
Money takes the form of either commodity money (with intrinsic value like gold) or fiat money (without intrinsic value established by government decree). Money serves three functions as a medium of exchange, unit of account, and store of value. The money supply includes M1 (currency and checkable deposits) and broader M2 (M1 plus savings deposits and money market funds). When the central bank increases reserves, the banking system can expand deposits by making loans, multiplying the initial change in reserves through the deposit multiplier.
The document discusses the monetary system in India. It defines money and its functions. It explains the different measures of money supply in India and the role of the Reserve Bank of India in managing the monetary system. It discusses how banks create money through fractional-reserve banking and the money multiplier effect. It also outlines the instruments used by RBI to control money supply such as bank rate, CRR, SLR etc.
This document discusses money supply and the banking system. It defines different measures of money supply (M1, M2, M3, M4) and explains how money is created through the banking system. Banks act as intermediaries that accept deposits and create loans, expanding the money supply through the money multiplier process. The money supply is determined by factors like public behavior, commercial bank behavior, and central bank influence. The document also covers equilibrium in the money market and how shifts in the money supply or demand curves can impact the equilibrium interest rate.
This document discusses money supply and the banking system. It defines different measures of money supply (M1, M2, M3, M4) and explains how money is created through the banking system. Banks act as intermediaries that accept deposits and create money through lending. This expands the money supply through the money multiplier process. The money supply is determined by factors like public behavior, commercial bank behavior, and central bank influence. The money market reaches equilibrium where the demand for money equals the supply.
The document discusses the definitions and components of money supply. It defines money as a medium of exchange, unit of account, store of value, and standard for deferred payments. It then outlines the different measures of money supply - M1, M2, M3, and M4. The rest of the document discusses the role and functions of central banks, monetary policy tools and their transmission mechanisms, balance sheet of a commercial bank, and concepts related to money multiplier and money supply.
Monetary policy uses tools like interest rates, reserve requirements, and open market operations to influence the money supply and shift the aggregate demand curve to achieve goals like economic growth and stable prices. Banks create money through fractional reserve banking by lending out deposits while holding only a portion as reserves, multiplying the original money supply. However, monetary policy faces limitations when interest rates hit zero and the economy is already at full employment, as further stimulus only causes inflation without increasing output.
The document discusses money supply and money demand. It explains that money supply is determined by the behavior of households, banks, and the Federal Reserve. Banks can create money through fractional-reserve banking by keeping only a fraction of deposits as reserves and lending out the rest. This allows the initial deposit to create additional money in the economy. The money supply and monetary base are also influenced by the reserve-deposit ratio, currency-deposit ratio, and money multiplier. The Federal Reserve can conduct open market operations and adjust reserve requirements and interest rates to influence the money supply. Money demand theories, including portfolio and transactions theories like the Baumol-Tobin model, are also covered.
The document discusses the money multiplier concept in India. It explains that the money multiplier is the amount of money banks can generate from each rupee of required reserves, depending on the reserve ratio set by the RBI. A higher reserve ratio means a lower money multiplier and less money generated in the banking system. The document provides examples of how the money multiplier works and factors that affect its size. It also outlines the various monetary policy tools used by the RBI, including required reserve ratios, policy rates, and open market operations.
The document discusses the money multiplier concept in India. It explains that the money multiplier is the amount of money banks can generate from each rupee of required reserves, depending on the reserve ratio set by the RBI. It provides an example showing that with a 10% required reserve ratio, a bank with Rs. 100 in reserves could generate Rs. 1000 in deposits. It also discusses how the RBI uses tools like required reserve ratios, interest rates, and open market operations to conduct monetary policy and influence money supply.
This document contains 3 topics:
1) It defines banks and describes their functions, roles, and importance in modern life.
2) It explains asymmetric information and gives examples like doctors, insurance, and subprime loans. It also discusses solutions to asymmetric information.
3) It defines financial markets, gives types like stock, bond, and commodities markets, and describes functions like putting savings to productive use and determining security prices.
1) Money supply is influenced by the lending activities of banks and the central bank's monetary policy tools.
2) Commercial banks can create new money by lending funds which are deposited at the bank, increasing the money supply.
3) The central bank uses tools like adjusting reserve requirements, rediscounting rates, and open market operations to regulate money supply and achieve monetary stability.
The document discusses several topics related to money and banking. It defines money as a universally accepted means of exchange that lowers transaction costs. It also discusses barter exchange as the oldest form of commerce where goods and services are directly exchanged. The primary functions of money are as a medium of exchange and a common unit of value, while secondary functions include storing value, transferring value, and acting as a deferred payment standard. Money demand is impacted by factors like inflation, income, interest rates, and uncertainty and stems from transaction and speculative motives. The supply of money refers to the total money held by the public and different measures of money supply are discussed, along with the roles of commercial banks, central banks, and policies that impact money creation
The document discusses the emergence and evolution of money. It begins by outlining the drawbacks of barter systems that led to the development of money. It then defines money and discusses its primary and secondary functions. The document also summarizes Keynes' theory of demand for money, which is comprised of transaction, precautionary, and speculative motives. It introduces concepts like liquidity preference, liquidity traps, and different measures of money supply such as M1, M2, M3, and M4. Finally, it discusses narrow and broad definitions of money.
This document defines and explains the key components of money supply and how it is measured. It discusses four main measures of money supply: M0, M1, M2, and M3. M1 includes currency in circulation and demand deposits. M2 adds savings deposits and time deposits. M3 includes longer-term time deposits. Each measure expands the definition in terms of liquidity and availability for use in transactions. The document also explains the components that make up each measure, such as currency, demand deposits, savings deposits, and time deposits.
Paper gives an explanation on how money is created in the modern economy ;through extension of credit in comparison with the traditional money creation process which relies on deposits to create money. It bases on three theories of banking ;the theory of financial intermediation ;fractional reserve theory as well as the the theory of credit creation ,giving an empirical analysis on which theory truly explains money creation in todays economy.
The document provides information on national income and employment. It discusses key concepts related to national income such as gross national product, net national product, domestic income, and personal income. It also covers different methods of measuring national income including the product method, income method, expenditure method, and value added method. The document notes some difficulties in measuring national income for developing countries and also outlines concepts of money such as medium of exchange, unit of account, and store of value. It discusses functions of central banks and commercial banks.
Economics project for class 12 on money and banking. it explains all the functions about RBI and includes everything needed to achieve good marks in project work.
The document discusses the monetary system and how money is created. It begins by explaining the functions of money and different types. It then discusses how banks create money by making loans that exceed their reserves, multiplying the original amount deposited. The U.S. money supply is measured by M1 and M2. The Federal Reserve uses tools like open market operations and adjusting reserve requirements to control the money supply and conduct monetary policy.
Case study is the most unsolved part in the Strategic management. There you need to highlight the case along with the academic knowledge. The key areas and the best solution are to be drawn every time. You might be thinking, how you can execute that easily, since you are having the least corporate exposure.
The document discusses the main functions and tools of monetary policy in India. It begins by outlining the Reserve Bank of India's roles as the monetary authority, regulator of the financial system, manager of foreign exchange, issuer of currency, and its developmental functions. It then explains various monetary policy tools used by RBI, including open market operations, reserve requirements, discount window lending, and the liquidity adjustment facility. The document also discusses key monetary aggregates and policy rates in India such as the cash reserve ratio, statutory liquidity ratio, repo rate, and reverse repo rate.
The digital marketing industry is changing faster than ever and those who don’t adapt with the times are losing market share. Where should marketers be focusing their efforts? What strategies are the experts seeing get the best results? Get up-to-speed with the latest industry insights, trends and predictions for the future in this panel discussion with some leading digital marketing experts.
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This document discusses money supply and the banking system. It defines different measures of money supply (M1, M2, M3, M4) and explains how money is created through the banking system. Banks act as intermediaries that accept deposits and create loans, expanding the money supply through the money multiplier process. The money supply is determined by factors like public behavior, commercial bank behavior, and central bank influence. The document also covers equilibrium in the money market and how shifts in the money supply or demand curves can impact the equilibrium interest rate.
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The document discusses the definitions and components of money supply. It defines money as a medium of exchange, unit of account, store of value, and standard for deferred payments. It then outlines the different measures of money supply - M1, M2, M3, and M4. The rest of the document discusses the role and functions of central banks, monetary policy tools and their transmission mechanisms, balance sheet of a commercial bank, and concepts related to money multiplier and money supply.
Monetary policy uses tools like interest rates, reserve requirements, and open market operations to influence the money supply and shift the aggregate demand curve to achieve goals like economic growth and stable prices. Banks create money through fractional reserve banking by lending out deposits while holding only a portion as reserves, multiplying the original money supply. However, monetary policy faces limitations when interest rates hit zero and the economy is already at full employment, as further stimulus only causes inflation without increasing output.
The document discusses money supply and money demand. It explains that money supply is determined by the behavior of households, banks, and the Federal Reserve. Banks can create money through fractional-reserve banking by keeping only a fraction of deposits as reserves and lending out the rest. This allows the initial deposit to create additional money in the economy. The money supply and monetary base are also influenced by the reserve-deposit ratio, currency-deposit ratio, and money multiplier. The Federal Reserve can conduct open market operations and adjust reserve requirements and interest rates to influence the money supply. Money demand theories, including portfolio and transactions theories like the Baumol-Tobin model, are also covered.
The document discusses the money multiplier concept in India. It explains that the money multiplier is the amount of money banks can generate from each rupee of required reserves, depending on the reserve ratio set by the RBI. A higher reserve ratio means a lower money multiplier and less money generated in the banking system. The document provides examples of how the money multiplier works and factors that affect its size. It also outlines the various monetary policy tools used by the RBI, including required reserve ratios, policy rates, and open market operations.
The document discusses the money multiplier concept in India. It explains that the money multiplier is the amount of money banks can generate from each rupee of required reserves, depending on the reserve ratio set by the RBI. It provides an example showing that with a 10% required reserve ratio, a bank with Rs. 100 in reserves could generate Rs. 1000 in deposits. It also discusses how the RBI uses tools like required reserve ratios, interest rates, and open market operations to conduct monetary policy and influence money supply.
This document contains 3 topics:
1) It defines banks and describes their functions, roles, and importance in modern life.
2) It explains asymmetric information and gives examples like doctors, insurance, and subprime loans. It also discusses solutions to asymmetric information.
3) It defines financial markets, gives types like stock, bond, and commodities markets, and describes functions like putting savings to productive use and determining security prices.
1) Money supply is influenced by the lending activities of banks and the central bank's monetary policy tools.
2) Commercial banks can create new money by lending funds which are deposited at the bank, increasing the money supply.
3) The central bank uses tools like adjusting reserve requirements, rediscounting rates, and open market operations to regulate money supply and achieve monetary stability.
The document discusses several topics related to money and banking. It defines money as a universally accepted means of exchange that lowers transaction costs. It also discusses barter exchange as the oldest form of commerce where goods and services are directly exchanged. The primary functions of money are as a medium of exchange and a common unit of value, while secondary functions include storing value, transferring value, and acting as a deferred payment standard. Money demand is impacted by factors like inflation, income, interest rates, and uncertainty and stems from transaction and speculative motives. The supply of money refers to the total money held by the public and different measures of money supply are discussed, along with the roles of commercial banks, central banks, and policies that impact money creation
The document discusses the emergence and evolution of money. It begins by outlining the drawbacks of barter systems that led to the development of money. It then defines money and discusses its primary and secondary functions. The document also summarizes Keynes' theory of demand for money, which is comprised of transaction, precautionary, and speculative motives. It introduces concepts like liquidity preference, liquidity traps, and different measures of money supply such as M1, M2, M3, and M4. Finally, it discusses narrow and broad definitions of money.
This document defines and explains the key components of money supply and how it is measured. It discusses four main measures of money supply: M0, M1, M2, and M3. M1 includes currency in circulation and demand deposits. M2 adds savings deposits and time deposits. M3 includes longer-term time deposits. Each measure expands the definition in terms of liquidity and availability for use in transactions. The document also explains the components that make up each measure, such as currency, demand deposits, savings deposits, and time deposits.
Paper gives an explanation on how money is created in the modern economy ;through extension of credit in comparison with the traditional money creation process which relies on deposits to create money. It bases on three theories of banking ;the theory of financial intermediation ;fractional reserve theory as well as the the theory of credit creation ,giving an empirical analysis on which theory truly explains money creation in todays economy.
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Economics project for class 12 on money and banking. it explains all the functions about RBI and includes everything needed to achieve good marks in project work.
The document discusses the monetary system and how money is created. It begins by explaining the functions of money and different types. It then discusses how banks create money by making loans that exceed their reserves, multiplying the original amount deposited. The U.S. money supply is measured by M1 and M2. The Federal Reserve uses tools like open market operations and adjusting reserve requirements to control the money supply and conduct monetary policy.
Case study is the most unsolved part in the Strategic management. There you need to highlight the case along with the academic knowledge. The key areas and the best solution are to be drawn every time. You might be thinking, how you can execute that easily, since you are having the least corporate exposure.
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Gokila digital marketing| consultant| Coimbatoredmgokila
Myself Gokila digital marketing consultant located in Coimbatore other various types of digital marketing services such as SEM
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Digital Marketing Services | Techvolt Software :
Digital Marketing is a latest method of Marketing techniques widely used across the Globe. Digital Marketing is an online marketing technique and methods used for all products and services through Search Engine and Social media advertisements. Previously the marketing techniques were used without using the internet via direct and indirect marketing strategies such as advertising through Telemarketing,Newspapers,Televisions,Posters etc.
List of Services offered in Digital Marketing |Techvolt Software :
Techvolt Software offers best Digital Marketing services for promoting your products and services through online platform on the below methods of Digital marketing
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4. Social Media Marketing (SMM)
5. Campaigns
Importance | Need of Digital Marketing (Online Promotions) :
1. Quick Promotions through Online
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With Regards
Gokila digital marketer
Coimbatore
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1. MONEY AND
FINANCIAL MARKETS
B.A.(HON) ECONOMICS,VI SEMESTER.
Topic 1: (Continuation…) Money,Concept, Functions,
Measurement, Theories of Money Supply
Determination.
1
2. MEASUREMENT OF MONEY
Money is a means of payment and thus a lubricant that facilitates exchange.
Definitional issues with Money
While defining money, we should know that there is a difference between
conceptualization of money and measurement of money. In fact, former
precedes the latter. There are two approaches of defining money: a priori or
theoretical approach and empirical approach.
1. In theoretical approach, money is first conceptualized in terms of certain functional
and institutional attributes and then the corresponding measure of money is obtained
by aggregating the financial assets which possess these attributes. In empirical
approach, we directly arrive at a measure of money as an aggregate of financial
assets which when introduced in certain functions, gives the best result.
2. The theoretical approach is more analytical and scientific whereas, the empirical
approach is ‘the antithesis of scientific procedure’. The former develops an
appropriate concept of money as an analytical entity and then suitably measures
money, thus clearly distinguishing between conceptualization and measurement. The
2
3. Measurement of Money
Monetary Aggregates
M1 = currency (with public) + demand deposits + other deposits with RBI
M2=M1 + savings deposit with post office savings bank
M3=M2 + time deposits
M4=M3 + all deposits with post office savings organization
The existing monetary aggregates M1-M4 were revisited by The Working
Group on Money Supply: Analytics and Methodology of Compilation in 1998.
(Chairman – Y.V. Reddy). This was because during financial liberalization,
banks were resorting to non-traditional sources of funds under increasing
competitive pressures. Financial institutions were operating differently. Hence,
M1-M4 was not in appropriate.
3
4. Differentiated on the nature and functioning of institutions issuing such instruments.
NM0 = Monetary Base = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI.
NM1 = Currency with the public + Demand deposits with the banking system + ‘Other’deposits with the RBI.
NM2 = NM1 + Short-term time deposits of residents (including and upto the contractual maturity of one year) + time
liability portion of savings deposits + Certificate of Deposits.
NM3 = NM2 + Long-term time deposits of residents (contractual maturity of over one year) + Call/Term funding from
financial institutions and call borrowings from non depository financial corporations.
L1 = NM3 + All deposits with the post office savings bank (excluding National Savings Certificates).
L2 = L1 +Term deposits with term lending institutions and refinancing institutions (FIs) +Term borrowing by FIs +
Certificates of deposit issued by FIs.
L3 = L2 + Public deposits of nonbanking financial companies.
New monetary and liquidity aggregates
4
5. Key features of new monetary and liquidity aggregates
NM0 is essentially the monetary base, compiled mainly from the balance sheet
of the Reserve Bank of India. NM1 purely reflects the non-interest bearing
monetary liabilities of the banking sector; NM2 includes besides currency and
current deposits, saving and short-term deposits reflecting the transactions
balances of entities. NM3 was redefined to reflect additionally to NM2 the call
funding that the banking system obtains from other financial institutions.
NM1, NM2 and NM3 are used to distinguish the new monetary aggregates [as
proposed by the Working Group on Money Supply: Analytics and Methodology
of Compilation (WGMS) (Chairman: Dr. Y.V. Reddy), June 1998] from the
existing monetary aggregates. NM2 and NM are based on the residency
concept and hence do not directly consider non-resident foreign currency
repatriable fixed deposits. Residency essentially relates to the country in which
the holder has a centre of economic interest.
Only non-resident repatriable foreign currency fixed deposits are excluded from
deposit liabilities and treated as external liabilities. Non-resident rupee-
5
6. Commercial banks have in recent years been investing in securities such as commercial paper,
shares and debentures issues by the commercial sector, which are not reflected in the conventional
credit aggregates. The definition of bank credit has been broadened to include so called ‘non-SLR’
investments.
In the new monetary aggregate NM3, capital account consists of paid-up capital, revaluations and
reserves.
The Working Group defined money as a set of financial aggregates whose variations could impact
aggregate economic activity. Foreign currency liabilities of banks have been identified explicitly which
has helped in more accurate compilation of banks’ net foreign assets.
Postal deposits have been excluded from monetary aggregates and are a part of liquidity aggregates.
This was to keep the differentiation criterion (stated above) intact. Also, the deposit liabilities of
financial institutions were made a part of broader liquidity aggregates.
After deregulation, since the share of non depository corporations has been increasing, therefore
liquidity aggregates were introduced so as to provide broader magnitudes of monetary and near
money liabilities issued by non-banking financial institutions.
6
8. Total reserves (R) = Excess Reserves (ER) + Required Reserves (RR)
rr = Required reserve ratio
e
d
= Desired excess reserve ratio = They are proportional to deposits.
Hence,RR=rr*D and ER=e
d
*D
Since R = RR + ER, implies, R = rr*D + e
d
*D = (rr+ e
d
)*D
Monetary Base (high powered money) MB = C + R
Calculating Complete Deposit Multiplier
MB=C+R=c
d
*D+(rr+e
d
)*D=(c
d
+rr+e
d
)*D
Hence,D=[1/(c
d
+rr+e
d
)]*MB
This implies, change in deposits = ∆D = [1/(c
d
+ rr + e
d
)] * ∆MB
[1/(c
d
+ rr + e
d
)] is known as the Complete Deposit Multiplier.
Calculating Complete Currency Multiplier
C=c
d
*D=c
d
*[1/(c
d
+rr+e
d
)]*
MB=[c
d
/(c
d
+rr+e
d
)]*MB
This implies, change in currency = ∆C = [c
d
/(c
d
+ rr + e
d
)] *
∆MB [c
d
/(c
d
+ rr + e
d
)] is known as the Complete Currency Multiplier.
8
9. Calculating Complete Money Multiplier
M=C+D=[{cd
/(cd
+rr+ed
)}*MB] +[{1/(cd
+rr+ed
)}*MB]
Hence M = {(1+cd
)/(cd
+ rr + ed
)} * MB
This implies, change in money = ∆M = [(1+cd
)/(cd
+ rr + ed
)] *
∆MB [(1+cd
)/(cd
+ rr + ed
)] is known as the Complete Money Multiplier.
Money Supply Equation
Money Supply= [(1+cd
)/(cd
+ rr + ed
)] * MB
9
10. Determinants of the Money Supply
Based on our previous analysis, it is natural to define the money supply (Ms) as
Money Supply= [(1+cd
)/(cd
+ rr + ed
)] * MB
This relationship is called the money supply equation, because it indicates how
much money is created(produced) in the economy for a given monetary base.
A change in any of these determinants will change the amount of money—-that is,
currency plus checkable deposits— available in the economy.
This analysis shows that changes in the monetary base and the money multiplier
actually affect the amount of money in the economy. We will see next why the money
supply might change due to changes in the behaviour of (1) The Central Bank, (2)
Banks, or (3) The public.
Federal Reserve Determinants of the Money Supply
The Central Bank has two primary ways of influencing the money supply: (1)
through the monetary base (MB) and (2) through the required reserve ratio (rr).
10
11. 1. Monetary base (MB) – Increase (Decrease) in monetary base by open market
purchases (sales) leads to an increase (decrease) in the money supply.
2. Required Reserve Ratio (rr) – Increase in rr reduces the money multiplier and leads to
reduction in money supply, decrease in rr has opposite effect.
Banking System Determinants of the Money Supply
The banking system helps determine the supply by its choice of the ratio of excess
reserves to deposits, ed
. Since higher excess reserves reduce the amount of loans the
banking system creates from a given monetary base, increases in ed
lead to reductions in
the money supply, whereas decreases in ed
lead to increases.
What factors might cause a bank to raise or lower its desired excess reserve ratio? The
major factors are changes in the market interest rate on loans, the risk of deposit
withdrawals, and the interest rates on sources of borrowed reserves.
11
12. We explain the link between these factors and the desired excess reserve ratio
Market interest rate on Loans :
This influences ed
because these interest rates are the opportunity costs of holding excess reserves. High market
interest rate on loans implies fall in ed
which results in increase in money supply.
Risk of deposit withdrawals :
Higher risk, greater ed
and hence lower money supply.
Interest rate on Borrowed reserves :
When the interest rate paid on borrowed reserves rise, ed
increases which reduces the compete deposit multiplier and the
money supply.
The Public’s Determinants of the Money Supply
The public chooses its desired currency to deposit ratio, which also helps determine the money supply. If people want
to take more cash transactions, the desired currency to deposit ratio will increase.
12
13. This will reduce the complete money multiplier and thus lead to a reduction in the money
supply. A decrease in cd
has the opposite effect.
1. Increase in interest rate on Checkable Deposits, results in decline in attractiveness of
holding money, which reduces cd
which increases money supply.
2. Fees on checkable deposits are cost of holding money in the form of deposits, so if they
increase, the cd
rises and hence the money supply falls.
3. cd
declines with income. Those with higher incomes are sophisticated users of banking
system and rely less on currency. So, higher income implies larger money supply.
4. If the probability of bank failure rises, people will favour currency and money supply will
fall.
5. Increase in illegal activity decreases the money supply by increasing the currency to
deposit ratio.
13
14. The Money Supply Curve
Our analysis of the money supply in the previous section showed the amount of money in the
economy ultimately depends on the monetary base, the excess reserve ratio, the required reserve
ratio, and the currency to deposit ratio.
The monetary base and the required reserve ratio are determined by the Central Bank, while
banks and depositors determine the excess reserve and currency to deposit ratios. We conclude our
analysis of the money supply process by graphically depicting the Money Supply Curve, the amount
the money suppliers are willing and able to supply at various interest rats.
Because economists disagree about the impact of interest rates on the determinants of the
money supply, we will distinguish between two views.
One is that the determinants of the money supply in equation Money Supply= [(1+cd
)/(cd
+ rr + ed
)] *
MB are exogenous, that is , determined by outside forces and do not depend on such variables as
interest rats.
According to this view, there is an Exogenous money supply: Changes in interest rates do not
alter the currency to deposit ratio or the desired excess reserve ratios of banks.
14
15. The second view is that an Endogenous money supply exists, The determinants of money supply,
most probably the currency to deposit ratio and the desired excess reserve ratio are endogenous and
depend on economic variables like interest rates. We will see how these two views affect the picture
of the moon supply curve.
Exogenous Money Supply Curve
Suppose banks wish to hold a fixed fraction of deposits as excess reserves and depositors hold a fixed fraction of deposits as
cash.
15
16. 16
In this case, Money supply is upward sloping ,because as the interest rate
rises, excess reserves fall, and the amount of money in the economy increases
due to the complete money multiplier. Also, higher interest rates lead to a lower
currency to deposit ratio, which works through the complete money multiplier to
further increase the money supply.
Endogenous Money Supply Curve
As noted earlier, some economists believe the excess reserve and currency to
deposit ratios are not constant but vary systematically with economic conditions.
17. 17
The diagram on the 15 slide shows exogenous money supply and on the 16th slide shows endogenous money supply curves.
The initial curves in both cases are Ms0.
Increase in MB, decrease in rr, decrease in cd, decrease in ed shifts the money supply curve to the right to Ms2 in both cases.
Decrease in MB, increase in rr, increase in cd, increase in ed shifts the money supply curve to the left to Ms1 in both cases.
MONEY MULTIPLIER APPROACH (as discussed by N. Jadhav)
M = m(.)*H
Where, M = nominal money stock, H = nominal reserve money, m(.) = money multiplier.
H=C+R
Where, C = Currency held by general public, R = Bank Reserves Broad money multiplier
m(.) = M/H
= (C + DD + TD)/ (C + R)
= (C + DD + TD)/ (C + R)
= C+DD+TD/C+r(DD+TD)
= 1+C/DD+TD/DD
C/DD+r(1+TD/DD = Dividing numerator and denominator by DD
= 1+c+t
c+r(1+t)
18. 18
Where, M = C + DD + TD, DD = Demand Deposits, TD = Time Deposits, r = reserve to deposit ratio, t = time deposit to demand
deposit ratio, c = currency to demand deposit ratio.
Hence, M = 1+c+t
c+r(1+t) *H
Adjustment
rt = current Cash Reserve Ratio (CRR)
ro = Initial or benchmark CRR
D = demand and time liabilities relevant for computation of the CRR
IR = Increment reserve requirements
DF = net CRR default for all commercial banks
Adjustment = (rt – ro)*D + IR – DF
H* = H – Adjustment factor
A fairly general model may be formulated as:
M= = 1+c+t
c+r(1+t). *(Ho +DF–ER)
Where, DF = Discretionary finance provided,
ER = Excess reserves, Ho = Non-borrowed reserve money
19. Changes in Variable
Rise in (C/DD) ratio (c)
Rise in (TD/DD) ratio (t)
Enhancement in reserve ratio (r)
Rise in non borrowed reserves (H*)
Enhancement in discretionary finance (DF)
Rise in excess reserves holdings of banks (ER)
Money Supply Responses
Contraction
Expansion
Contraction
Expansion
Expansion
Contraction
19
20. 20
References:
• M .R .Baye and D.W.Jansen “ Money , Banking , and Financial Markets: An Economics
Approach.
• N. Jadhav: Monetary Policy, Financial Stability and Central Banking in India, Macmillan, 2006.
• Online Sources
Course Teacher
Dr.D.Appala Naidu
Thank you