<<–2/”>a >a href=”https://exam.pscnotes.com/Money-supply-2/”>Money Supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and Savings accounts.
Money Supply can be estimated as narrow or Broad Money.
There are four measures of money supply in India which are denoted by M1, M2, M3 and M4. This Classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to this till March 1968, the RBI published only one measure of the money supply, M or defined as currency and demand deposits with the public. This was in keeping with the traditional and Keynesian views of the narrow measure of the money supply.
M1 (Narrow Money) consists of:
(i) Currency with the public which includes notes and coins of all denominations in circulation excluding cash on hand with banks:
(ii) Demand deposits with commercial and Cooperative banks, excluding inter-bank deposits; and
(iii) ‘Other deposits’ with RBI which include current deposits of foreign central banks, financial institutions and quasi-financial institutions such as IDBI, IFCI, etc., other than of banks, IMF, IBRD, etc. The RBI characterizes as narrow money.
M2. which consists of M1 plus post office savings bank deposits. Since savings bank deposits of commercial and cooperative banks are included in the money supply, it is essential to include post office savings bank deposits. The majority of people in rural and urban India have preference for post office deposits from the safety viewpoint than bank deposits.
M3. (Broad Money) which consists of M1, plus time deposits with commercial and cooperative banks, excluding interbank time deposits. The RBI calls M3 as broad money.
M4.which consists of M3 plus total post office deposits comprising time deposits and demand deposits as well. This is the broadest measure of money supply.
High powered money – The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money. It consists of currency ( notes and coins in circulation with the public and vault cash of Commercial Banks) and deposits held by the Government of India and commercial banks with RBI. If a memeber of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit holders. These items are claims which the general public, government or banks have on RBI and are considered to be the liability of RBI.
RBI acquires assets against these liabilities. The process can be understood easily if we consider a simple stylised example. Suppose RBI purchases gold or dollars worth Rs. 5. It pays for thr gold or Foreign Exchange by issuing currency to the seller. The currency in circulation in the economy thus goes up by Rs. 5, an item that shows up on the liabilityside of RBI’s Balance sheet. The value of the acquired asset, also equal to Rs. 5, is entered under the appropriate head on the Assets side. Similarly, the RBI acquires debt Bonds or securities issued by the government and pays the government by issuing currency. It issues loans to commercial banks in a similar fashion.
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Money Supply
Money supply is the total amount of money circulating in an economy at a given time. It is typically measured by M0, M1, M2, or M3.
M0 is the narrowest measure of money supply and includes only physical currency and coins in circulation. M1 is a broader measure that includes M0 plus demand deposits and other checkable deposits. M2 is an even broader measure that includes M1 plus savings deposits, Money Market deposit accounts, and small time deposits. M3 is the broadest measure of money supply and includes M2 plus large time deposits, institutional money market funds, and short-term repurchase agreements.
The money supply is important because it affects the level of economic activity. When the money supply increases, it can lead to Inflation. When the money supply decreases, it can lead to Deflation.
High Powered Money
High powered money is the total amount of money that is created by the central bank. It is typically measured by base money, which includes currency in circulation and bank reserves.
Base money is important because it is the foundation of the money supply. When the central bank increases base money, it can lead to an increase in the money supply. When the central bank decreases base money, it can lead to a decrease in the money supply.
The money multiplier is a measure of how much the money supply can increase as a result of an increase in base money. It is calculated by dividing the money supply by base money.
The money multiplier is not constant. It can change depending on a number of factors, such as the public’s willingness to hold cash and the banks’ willingness to lend.
Velocity of Money
The velocity of money is a measure of how quickly money is exchanged in an economy. It is calculated by dividing the Nominal GDP by the money supply.
The velocity of money can change depending on a number of factors, such as the level of economic activity and the use of credit cards.
Money Demand
Money demand is the amount of money that people and businesses want to hold. It is determined by a number of factors, such as the interest rate, the level of income, and the expected inflation rate.
When the interest rate decreases, people and businesses will want to hold more money. This is because they can earn a lower return on their money by holding it in cash or in low-interest savings accounts.
When the level of income increases, people and businesses will want to hold more money. This is because they will have more money to spend and will need to hold more money to make their purchases.
When the expected inflation rate increases, people and businesses will want to hold more money. This is because they will need to hold more money to protect their purchasing power from inflation.
Money Supply Targeting
Money supply targeting is a Monetary Policy strategy in which the central bank sets a target for the money supply and then uses its tools to achieve that target.
The central bank can use a number of tools to control the money supply, such as open market operations, reserve requirements, and the DISCOUNT rate.
Open market operations are the buying and selling of Government Securities by the central bank. When the central bank buys government securities, it injects money into the economy. When the central bank sells government securities, it withdraws money from the economy.
Reserve requirements are the amount of money that banks are required to hold in reserve. When the central bank increases reserve requirements, it makes it more difficult for banks to lend money. This reduces the money supply. When the central bank decreases reserve requirements, it makes it easier for banks to lend money. This increases the money supply.
The discount rate is the interest rate that the central bank charges banks for loans. When the central bank increases the discount rate, it makes it more expensive for banks to borrow money. This reduces the money supply. When the central bank decreases the discount rate, it makes it cheaper for banks to borrow money. This increases the money supply.
Money supply targeting is a controversial monetary policy strategy. Some economists believe that it is an effective way to control inflation. Others believe that it is too rigid and that it can lead to instability in the Financial Markets.
What is money supply?
Money supply is a measure of the total amount of money circulating in an economy. It is typically calculated by adding up the value of all the currency in circulation, plus the value of all the checking and savings accounts.
What are the different Types of money supply?
There are three main types of money supply: M1, M2, and M3. M1 is the narrowest measure of money supply and includes only currency in circulation and checking accounts. M2 is a broader measure of money supply and includes M1 plus savings accounts, money market funds, and other short-term deposits. M3 is the broadest measure of money supply and includes M2 plus long-term deposits and other large time deposits.
What determines the money supply?
The money supply is determined by the central bank, which is the government agency responsible for managing the country’s monetary policy. The central bank can control the money supply by buying and selling Government Bonds, by setting interest rates, and by changing reserve requirements.
What are the effects of changes in the money supply?
Changes in the money supply can have a significant impact on the economy. When the money supply increases, it can lead to inflation, as businesses and consumers have more money to spend. When the money supply decreases, it can lead to deflation, as businesses and consumers have less money to spend.
What is high-powered money?
High-powered money is the total amount of money that is created by the central bank. It is equal to the sum of the central bank’s liabilities, which include currency in circulation and reserves held by commercial banks.
What are the effects of changes in high-powered money?
Changes in high-powered money have a direct impact on the money supply. When the central bank increases high-powered money, it increases the money supply. When the central bank decreases high-powered money, it decreases the money supply.
What are the benefits of a high money supply?
A high money supply can lead to economic Growth, as businesses and consumers have more money to spend. It can also lead to lower interest rates, as banks have more money to lend.
What are the risks of a high money supply?
A high money supply can lead to inflation, as businesses and consumers have more money to spend. It can also lead to asset bubbles, as investors bid up the prices of assets such as stocks and real estate.
What are the benefits of a low money supply?
A low money supply can lead to price stability, as businesses and consumers have less money to spend. It can also lead to a stronger currency, as investors are more confident in the value of the currency.
What are the risks of a low money supply?
A low money supply can lead to deflation, as businesses and consumers have less money to spend. It can also lead to a Recession, as businesses cut back on Investment and hiring.
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Which of the following is not a component of M1?
(A) Currency
(B) Demand deposits
(C) Traveler’s checks
(D) Savings deposits -
Which of the following is not a component of M2?
(A) M1
(B) Savings deposits
(C) Small time deposits
(D) Money market Mutual Funds -
The Federal Reserve can increase the money supply by:
(A) Buying government bonds from banks.
(B) Selling government bonds to banks.
(C) Raising the reserve requirement.
(D) Lowering the discount rate. -
The money multiplier is equal to:
(A) 1 / reserve requirement.
(B) 1 + reserve requirement.
(C) 1 / discount rate.
(D) 1 + discount rate. -
When the money supply increases, it will:
(A) Increase interest rates.
(B) Decrease interest rates.
(C) Have no effect on interest rates. -
When the money supply decreases, it will:
(A) Increase interest rates.
(B) Decrease interest rates.
(C) Have no effect on interest rates. -
The Federal Reserve is responsible for:
(A) Setting interest rates.
(B) Conducting open market operations.
(C) Supervising and regulating banks.
(D) All of the above. -
The Federal Reserve System is made up of:
(A) 12 regional Federal Reserve Banks.
(B) The Board of Governors in Washington, D.C.
(C) The Federal Open Market Committee.
(D) All of the above. -
The Federal Open Market Committee is responsible for:
(A) Setting interest rates.
(B) Conducting open market operations.
(C) Supervising and regulating banks.
(D) None of the above. -
The discount rate is the interest rate that the Federal Reserve charges banks for loans.
(A) True
(B) False