MONEY SUPPLY

Money-supply/”>Money Supply

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, M₃and 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 M₁plus 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 M₃as broad money.
M₄.which consists of M₃plus 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.

The money supply is a measure of the total amount of money in circulation in an economy. It is important because it can affect Inflation, interest rates, and economic Growth. The Federal Reserve, the central bank of the United States, is responsible for managing the money supply.

There are several different measures of the money supply, each with its own advantages and disadvantages. The most narrow measure, M0, includes only currency in circulation and demand deposits at commercial banks. M1 is a broader measure that includes M0 plus other checkable deposits. M2 is an even broader measure that includes M1 plus savings deposits, small time deposits, and Money Market mutual fund balances. M3 is the broadest measure of the money supply and includes M2 plus large time deposits, institutional money market funds, and short-term repurchase agreements.

The Federal Reserve uses a variety of tools to manage the money supply, including open market operations, reserve requirements, and the DISCOUNT rate. Open market operations are the most common tool used by the Federal Reserve to manage the money supply. The Federal Reserve buys and sells Government Securities in the open market, which increases or decreases the amount of money in circulation. Reserve requirements are the amount of money that banks are required to hold in reserve against their deposits. The Federal Reserve can increase or decrease reserve requirements to control the amount of money that banks can lend. The discount rate is the interest rate that the Federal Reserve charges banks for loans. The Federal Reserve can raise or lower the discount rate to influence the amount of money that banks borrow.

The Federal Reserve’s goal is to keep the money supply growing at a rate that is consistent with stable prices and economic growth. However, it is difficult to control the money supply precisely because there are many factors that can affect it, such as the level of economic activity, the amount of borrowing by businesses and consumers, and the behavior of banks.

The money supply is an important tool that the Federal Reserve uses to influence the economy. By controlling the money supply, the Federal Reserve can help to keep prices stable, promote economic growth, and prevent recessions.

The money supply is a complex issue, and there is no single “right” answer to the question of how much money should be in circulation. The Federal Reserve must carefully consider a variety of factors, including the current state of the economy, when making decisions about the money supply.

What is Inflation?
Inflation is a general increase in prices and fall in the purchasing value of money.

What causes inflation?
Inflation can be caused by a number of factors, including:

An increase in the money supply
An increase in demand for goods and Services
A decrease in the supply of goods and services
A decrease in productivity

What are the effects of inflation?
Inflation can have a number of effects on an economy, including:

It can make it more difficult for businesses to plan for the future.
It can make it more difficult for people to save money.
It can make it more difficult for people to afford goods and services.
It can lead to social unrest.

What are the different types of inflation?
There are two main types of inflation:

Demand-pull inflation: This type of inflation occurs when there is an increase in Aggregate Demand, which is the total demand for goods and services in an economy. This can happen when the government increases spending, when the central bank lowers interest rates, or when there is an increase in exports.
Cost-push inflation: This type of inflation occurs when there is an increase in the costs of production, which can be caused by an increase in wages, an increase in the prices of raw materials, or an increase in taxes.

What is the difference between inflation and Deflation?
Inflation is a general increase in prices, while deflation is a general decrease in prices.

What is the ideal rate of inflation?
There is no one-size-fits-all answer to this question, as the ideal rate of inflation will vary depending on the country and the economic situation. However, most economists agree that a low and stable rate of inflation is desirable.

What are the tools that the government can use to control inflation?
The government can use a number of tools to control inflation, including:

Monetary Policy: The central bank can use monetary policy to control the money supply. By increasing or decreasing the money supply, the central bank can influence interest rates and inflation.
Fiscal Policy: The government can use fiscal policy to control inflation by raising or lowering taxes and spending. By increasing or decreasing taxes and spending, the government can influence aggregate demand and inflation.
Wage and price controls: The government can use wage and price controls to directly control the prices of goods and services. However, wage and price controls are often ineffective and can lead to shortages and black markets.

What is the relationship between inflation and Unemployment?
There is a trade-off between inflation and unemployment. When the government tries to reduce unemployment, it may cause inflation to increase. Conversely, when the government tries to reduce inflation, it may cause unemployment to increase. This is known as the Phillips Curve.

What is the relationship between inflation and interest rates?
There is a positive relationship between inflation and interest rates. When inflation increases, interest rates tend to increase as well. This is because lenders demand a higher interest rate to compensate for the loss of purchasing power that their money will experience due to inflation.

What is the relationship between inflation and exchange rates?
There is a negative relationship between inflation and exchange rates. When inflation increases, the value of a country’s currency tends to decrease. This is because investors are less willing to hold a currency that is losing value due to inflation.

What is the relationship between inflation and economic growth?
There is a complex relationship between inflation and economic growth. In the short run, inflation can boost economic growth by increasing aggregate demand. However, in the long run, inflation can lead to economic instability and slow economic growth.

The Federal Reserve is responsible for:
(A) setting interest rates
(B) regulating banks
(C) printing money
(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) both (A) and (B)
The Federal Reserve’s primary tool for controlling the money supply is:
(A) open market operations
(B) the discount rate
(C) reserve requirements
Open market operations are the buying and selling of:
(A) government securities
(B) foreign currencies
(C) both (A) and (B)
The discount rate is the interest rate that the Federal Reserve charges banks for loans.
(A) True
(B) False
Reserve requirements are the amount of money that banks are required to hold in reserve.
(A) True
(B) False
The Federal Reserve’s goal is to keep inflation low and stable.
(A) True
(B) False
The Federal Reserve’s goal is to keep unemployment low.
(A) True
(B) False
The Federal Reserve’s goal is to keep the stock market stable.
(A) True
(B) False
The Federal Reserve’s goal is to keep the value of the dollar stable.
(A) True
(B) False