The following are the subtopics of narrow MoneyMoney:
- Currency in circulation
- Demand deposits
Narrow money is a measure of the Money Supply that includes only the most liquid forms of money. It is typically defined as currency in circulation plus demand deposits. Currency in circulation refers to the physical money that is in the hands of the public, while demand deposits are the funds that are held in checking accounts. Narrow money is a good measure of the liquidity of the economy, as it includes only the forms of money that can be easily used to make purchases.
Narrow money is a measure of the money supply that includes only the most liquid forms of money. It is typically defined as currency in circulation plus demand deposits. Currency in circulation refers to the physical money that is in the hands of the public, while demand deposits are the funds that are held in checking accounts. Narrow money is a good measure of the liquidity of the economy, as it includes only the forms of money that can be easily used to make purchases.
Currency in circulation is the physical money that is in the hands of the public. This includes coins and banknotes. Currency in circulation is a good measure of the liquidity of the economy, as it is the most readily available form of money.
Demand deposits are the funds that are held in checking accounts. Demand deposits are considered to be money because they can be easily withdrawn and used to make purchases. Demand deposits are a good measure of the liquidity of the economy, as they are a form of money that can be easily converted into cash.
Narrow money is a good measure of the liquidity of the economy, as it includes only the forms of money that can be easily used to make purchases. Narrow money is typically used by central banks to control the money supply. By increasing or decreasing the amount of narrow money in circulation, central banks can influence the level of economic activity.
Narrow money is also used by economists to track the performance of the economy. By looking at the changes in narrow money, economists can get a sense of how the economy is doing. For example, if narrow money is increasing, it is a sign that the economy is growing. If narrow money is decreasing, it is a sign that the economy is contracting.
Narrow money is a useful tool for both central banks and economists. It is a good measure of the liquidity of the economy and can be used to track the performance of the economy.
In recent years, there has been a debate about whether narrow money is still a relevant measure of the money supply. Some economists argue that narrow money is no longer a good measure of the liquidity of the economy, as people are increasingly using electronic forms of money, such as credit cards and debit cards. These electronic forms of money are not included in narrow money, but they can still be used to make purchases.
Other economists argue that narrow money is still a relevant measure of the money supply, as it is the most liquid form of money. They argue that electronic forms of money are not as liquid as cash or checking deposits, as they cannot be used to make purchases without first being converted into cash or checking deposits.
The debate about whether narrow money is still a relevant measure of the money supply is likely to continue. However, narrow money remains a useful tool for central banks and economists, as it is a good measure of the liquidity of the economy.
Currency in circulation
- What is currency in circulation?
Currency in circulation is the total amount of physical money that is in the hands of the public. It includes coins and banknotes that are held by individuals, businesses, and governments. - How is currency in circulation measured?
Currency in circulation is typically measured by the central bank of a country. The central bank will collect data on the amount of physical money that is in circulation, and then publish this data on a regular basis. - What are the factors that affect currency in circulation?
The factors that affect currency in circulation include:- The level of economic activity: When the economy is growing, people tend to spend more money, which increases the demand for currency.
- The interest rate: When the interest rate is high, people tend to save more money, which reduces the demand for currency.
- The exchange rate: When the exchange rate is weak, people tend to buy more foreign currency, which reduces the amount of domestic currency in circulation.
- What are the implications of changes in currency in circulation?
Changes in currency in circulation can have a number of implications for the economy, including:- Changes in InflationInflation: When the amount of currency in circulation increases, it can lead to inflation, as there is more money chasing the same amount of goods and services.
- Changes in interest rates: When the amount of currency in circulation increases, it can put downward pressure on interest rates, as there is more money available to lend.
- Changes in exchange rates: When the amount of currency in circulation increases, it can put downward pressure on the exchange rate, as there is more supply of the currency relative to demand.
Demand deposits
- What are demand deposits?
Demand deposits are funds that are held in checking accounts. They are considered to be the most liquid form of money, as they can be easily withdrawn and used to make purchases. - How are demand deposits created?
Demand deposits are created when a bank lends money to a customer. The customer then deposits the loan into their checking account, and the bank credits the customer’s account with the amount of the loan. - What are the factors that affect the demand for demand deposits?
The factors that affect the demand for demand deposits include:- The interest rate: When the interest rate is high, people tend to save more money, which reduces the demand for demand deposits.
- The level of economic activity: When the economy is growing, people tend to spend more money, which increases the demand for demand deposits.
- The risk of default: When the risk of default is high, people tend to hold less money in checking accounts and more money in other forms of SavingsSavings, such as savings accounts or Money Market funds.
- What are the implications of changes in the demand for demand deposits?
Changes in the demand for demand deposits can have a number of implications for the economy, including:- Changes in the money supply: When the demand for demand deposits decreases, the money supply decreases, as banks have less money to lend.
- Changes in interest rates: When the demand for demand deposits decreases, interest rates tend to fall, as there is less demand for loans.
- Changes in the exchange rate: When the demand for demand deposits decreases, the exchange rate tends to appreciate, as there is less demand for the domestic currency.
Question 1
Which of the following is not a component of narrow money?
(A) Currency in circulation
(B) Demand deposits
(CC) Savings deposits
(D) Traveler’s checks
Answer
(C) Savings deposits are not a component of narrow money. Narrow money is a measure of the money supply that includes only the most liquid forms of money. It is typically defined as currency in circulation plus demand deposits. Currency in circulation refers to the physical money that is in the hands of the public, while demand deposits are the funds that are held in checking accounts. Savings deposits are less liquid than demand deposits because they cannot be easily withdrawn.
Question 2
If the central bank increases the money supply, what is the likely effect on narrow money?
(A) Narrow money will increase.
(B) Narrow money will decrease.
(C) Narrow money will stay the same.
Answer
(A) If the central bank increases the money supply, narrow money will increase. This is because the central bank can do this by buying BondsBondsGovernment Bonds from Commercial Banks, which will increase the amount of reserves that banks have. Banks can then use these reserves to make more loans, which will increase the amount of money in circulation.
Question 3
What is the relationship between narrow money and inflation?
(A) There is no relationship between narrow money and inflation.
(B) Narrow money is a good predictor of inflation.
(C) Narrow money is a bad predictor of inflation.
Answer
(B) Narrow money is a good predictor of inflation. This is because when the money supply increases, it can lead to higher prices. This is because when there is more money in circulation, people are willing to pay more for goods and services.
Question 4
What is the relationship between narrow money and economic growth?
(A) There is no relationship between narrow money and economic growth.
(B) Narrow money is a good predictor of economic growth.
(C) Narrow money is a bad predictor of economic growth.
Answer
(C) Narrow money is a bad predictor of economic growth. This is because there are many other factors that can affect economic growth, such as government policy, technological innovation, and the level of education.