Monetary Economics

1. Supply of Money ( Meaning and component)
• Money is derived from a Latin word, Moneta.
• The term money refers to an object that is accepted as a mode for the
transaction of goods and services in general and repayment of debts in a
particular country or socio-economic framework.

2. Definitions of money
• Robertson has defined money as “Anything which is widely accepted in payment for
goods, or in discharge of other kinds of obligations.”
(a) Primary Functions:
i. Medium of Exchange
ii. Measure of Value
(b) Secondary Functions:
i. Store of Value
ii. Standard of Deferred Payments

3. Money Supply – A Glance
• The money supply is all the currency and other liquid instruments in a
country's economy on the date measured.
• India's Money Supply Grows By 12.6% On Year , September 14, 2020.
• The measures of money supply in India are classified into four categories
M1, M2, M3 and M4 along with M0. This classification was introduced in
April 1977 by Reserve Bank of India.

4. How can we measure the amount of money
in the economy?
The money supply is categorized as M1, M2, M3 and M4.
• M1 refers to the money stock that includes coins, currency notes, and demand
deposits.
• M2 refers to the money stock that includes coins, currency notes, demand deposits,
and time deposits.
• M3 refers to the money stock includes coins, currency notes, demand deposits, time
deposits, and post office deposits.
• M4 refers to the money stock includes coins, currency notes, demand deposits, time
deposits, post office deposits, savings bank, and term deposits.

5. Current Status – M1
• India Money Supply M1 was reported at 604.312 USD bn in Dec 2020. This
records an increase from the previous number of 587.539 USD bn for Nov
2020.

6. Current Status – M2
• India Money Supply M2 was reported at 607.936 USD bn in Nov 2020. This
records an increase from the previous number of 594.844 USD bn for Oct
2020.

7. Current Status – M3

8. Current Status – M4
• India’s Money Supply: M4 data was reported at 157,393,240.000 INR mn in
Apr 2019. This records a decrease from the previous number of
157,888,260.000 INR mn for Mar 2019.

9. Demand for money (meaning & sources)
• In monetary economics, the demand for money is the desired
holding of financial assets in the form of money: that is, cash or
bank deposits rather than investments.
• It can refer to the demand for money narrowly defined as M1
(directly spendable holdings), or for money in the broader sense of
M2 or M3.

10. Demand for Money and Liquidity preference
• The demand for money refers to how much assets individuals wish to
hold in the form of money (as opposed to illiquid physical assets.)
• It is sometimes referred to as liquidity preference. The demand for money
is related to income, interest rates and whether people prefer to hold
cash(money) or illiquid assets like money.

11. Types of demand for money
1.Transaction demand – money needed to buy goods – this is
related to income.
2.Precautionary demand – money needed for financial
emergencies.
3.Asset motive/speculative demand – when people wish to hold
money rather than buy assets/bonds/risky investment.

12. Speculative demand

13. Table

14. Implications
• Liquidity trap (also called zero lower bound) is a situation in which nominal
interest rates is already close to zero and any further increase in money
supply does not have any expansionary effect.
• Liquidity trap limits the monetary expansion and reduces the effectiveness of
monetary policy in combating recessions.

15. Monetary Policy: Meaning, Objectives
• Monetary policy refers to the actions undertaken by a nation's central bank
to control money supply and achieve sustainable economic growth.
Monetary policy can be broadly classified as either expansionary or
contractionary.

16. Objectives
• (i) Neutrality of money
• (ii) Stability of exchange rates
• (iii) Price stability
• (iv) Full Employment
• (v) Economic Growth

17. Instruments