Money Supply

12 Key excerpts on "Money Supply"

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  eBook - ePub

  Applied International Economics

  • W. Charles Sawyer, Richard L. Sprinkle(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  2 Internationally, this definition of the Money Supply is known as narrow money.

  Other definitions of money are possible. There are a number of financial assets that are referred to as near monies that can be used as money in many circumstances. Near monies are highly liquid financial assets such as savings accounts, time deposits, and short-term government securities. In many cases, these assets cannot be spent as easily as can currency or a demand deposit at a local bank. An example of a near money is an account with a money market mutual fund. In the U.S., this is a common form of near money. In other countries, where this form of near money is less common, a large amount of near money is held in the form of time deposits. For the most part, near monies do not function as a medium of exchange but they can be readily converted into currency or demand deposits. For the U.S., M1 plus money market mutual funds and time deposits constitutes M2. In an international context, the term for M2 is called broad money.

  Ultimately, the supply of money within a country is the result of a process that we need to describe. In order to do this we will need to look at an important part of the Money Supply known as the monetary base (B). The monetary base (B) is composed of cash in the hands of the

  BOX 15.1

  WHAT IS THE SUPPLY OF MONEY?

  Even though the public can hold money for a variety of reasons, the supply of money that is relevant for the purposes of economic policy is a measure of money that will be used for economic transactions within a given period of time, such as a year. Unfortunately, in most countries such a perfect measure of the Money Supply does not exist. For example, in the U.S. neither M1 nor M2 is identical to the supply of money the public uses for short-run economic transactions. The primary reason why this is true is related to the existence of money market mutual funds. These funds can be used for transactions, as each account has limited check-writing capabilities. In addition, these accounts are also widely used as a parking place for funds between the purchase and sale of equities, bonds, and other long-term financial assets. As a result, M1 understates the amount of money that the public could use for short-run economic transactions, and M2 overstates this same amount. In this case, the central bank of the U.S. cannot know with certainty what the amount of money is that the public intends to use for short-run economic activities. To a greater or lesser extent, every country has this problem of defining what the relevant supply of money is. In the discussion that follows, we assume that there is a relevant supply of money under the central bank’s control. However, one should keep in mind that the supply of money in an economy is not as clear-cut in most cases as central bankers or those following the state of the economy might like.

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  Money, Banking, And Financial Markets In China

  • Gang Yi(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Money (Ml}= (Currency in circulation+ Deposits of other domes-tic transactor + Demand deposit in the banking system + Demand deposit in rural credit co-ops). 2. Quasi-money is defined as the sum of time deposit of institutions plus the total urban and rural households' saving. 3. M2 is defined as money plus quasi-money. 4. Reserve money = currency in circulation + Banks' reserve + De-posits of other domestic transactor. SOURCE: International Financial Statistics Yearbook, 1993, Interna-tional Monetary Fund (IMF), Washington, D.C. 5 The Money Supply Process There a.re many articles in the recent literature that discuss different aspects of the financial sector in China. For example, Feltenstein and Farha-dian ( 1987) construct a model of inflation by using a general equilibrium (or disequilibrium) framework. Chow (1987) estimates the demand for money in China. Perkins (1988) discusses the relationship between price reform and inflation. Feltenstein and Ha (1989) estimate the repressed inflation and liquidity overhang. Yi (1991b) discusses the monetization process. The task of this chapter is to investigate the Money Supply process. During economic reform, the banking system in China has changed from an all-inclusive mono-banking system to a more or less market-oriented central bank system. The Money Supply mechanism in this semi-reformed environment is unique in the sense that it has attributes of both a centrally planned economy and a market economy. Study of the Money Supply mech-anism is the primary focus of this chapter, which is organized as follows. Section 5.1 defines the monetary base and examines its components. Sec-tion 5.2 discusses the factors that influence the monetary base. The next section analyzes the multiplier effect of the money creation process. The fourth section addresses the factors that influence the multiplier and its predictability. The final section summarizes the relationship between the Money Supply and the monetary base, the multiplier.

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  The Banks and the Monetary System in the UK, 1959-1971

  • J.E. Wadsworth(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  In particular, let us add, Money Supply in Britain has to be considered in the environment of UK financial institutions, especially banks. If the Money Supply is important, it is presumably because of its relationship to aggregate demand. As the Radcliffe Committee put it, the ‘relevance of the availability of funds to the pressure of total demand is what lies behind the supreme importance which is often attached to “the supply of money”’. A clear distinction needs to be drawn between the stock of money and its flow, and until recently attention has been directed almost entirely at the effects of the flow. Today it is being increasingly suggested that attention should be paid to the stock, and in particular to changes in the stock.

  In discussing the Money Supply, however, a satisfactory definition is a first essential. In one sense an appropriate definition depends upon the context in which Money Supply is to be considered. If related to aggregate demand, the definition has to be concerned with the spendability of money. Thus it should be associated primarily with money in the sense of something that can be spent immediately, as contrasted with near-money, which is moderately liquid but cannot be used directly for spending by the holder. An example of near-money would be funds deposited with a building society or similar undertaking. Much near-money is readily spendable, though not normally directly or immediately as with currency and most bank deposits, but only after some other operation to turn it into one of those forms. Moroever, as we shall see, if it is turned into spendable money it does not increase the total of final means of payment – that is to say, the ‘active’ Money Supply.

  In International Financial Statistics , published by the International Monetary Fund, money is by implication defined as currency and bank deposits, the figures for the United Kingdom including balances on deposit as well as current accounts. ‘Quasi-money’ – that is, near-money – is defined generally as ‘time and savings deposits and other liabilities of the monetary system that the user of the data may or may not wish to consider to be money’. Thus it is clearly indicated that any definition of the Money Supply is subjective, and depends upon the attitudes of users and their intentions. The figures recorded in International Financial Statistics are quite close to those given by the Central Statistical Office in its publication Financial Statistics . This, too, admits that ‘any definition of the Money Supply is arbitrary’. The Organisation for Economic Cooperation and Development, by implication, has accepted this point, as it was until recently publishing a series for the United Kingdom on a very narrow basis, but has now changed to one based on the Financial Statistics series. This widely accepted definition combines currency in circulation with the public with net deposits by UK residents with the whole of the banking sector,13 including both sterling and non-sterling current and deposit accounts. Table A8

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  Management Economics: An Accelerated Approach

  An Accelerated Approach

  • William G. Forgang, Karl W. Einolf(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  a medium of exchange. The unit of account function means that goods and services are priced in money terms. The medium of exchange function means that goods and services are exchanged for money.

  Application Box 3.6

  The nation’s Money Supply (M1) in November 2005 was $1,372 billion.

  Source: w­w­w­.­e­c­o­n­o­m­a­g­i­c­.­c­o­m­.

  Therefore, one component of the Money Supply is currency and coins. However, many purchases are completed by writing checks, and dollar balances in checking accounts (demand deposits) are the largest part of the Money Supply. Checking deposits and currency and coin are the largest components of the M1 definition of money.

  The Equation of Exchange

  One way to examine the relationship between the Money Supply and gross domestic product is through the equation of exchange (see Table 3.1 ).

  The equation of exchange is an identity. On the left side of the equation, the supply of money (M ) is multiplied by the velocity of money (V ). The velocity of money is the average number of times a dollar or deposit is used to complete transactions during a year. For example, assume individuals are paid weekly and spend the full amount before their next pay period. Under these restrictive assumptions, the velocity of money is 52. If individuals are paid monthly and spend the full amount on goods and services prior to the next pay period, the velocity is 12.

  Table 3.1 Equation of Exchange

  MV = PT

  Where:

  M = Money Supply

  V = velocity of money

  P = price level

  T = number of transactions

  The left side of the equation of exchange is total expenditures. It is the Money Supply multiplied by the velocity. The right side of the equation is total receipts , which are the average price of goods and services (P ) multiplied by the number of transactions (T

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  Money, Banking, Financial Markets and Institutions

  • Michael Brandl(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Money, Money Supply, and Interest 2 2-1 The Concept of Money 6 2-2 Amount of Money and Money Through Time 10 2-3 Money Supplies 14 2-4 The Price of Money: Interest Rates 19 2-5 Conclusion 22 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CHAPTER 2 Sample Design About Money The Concept of Money One of the hit songs from the Broadway musical Cabaret! is the catchy tune “Money.” The refrain from the song goes “Money makes the world go around, the world go around, the world go around. . . .” It’s a catchy little phrase that may get your foot tapping, but what does it really say? What does one really mean by money ? How exactly does it “make the world go around”? The concept of money is something everyone, including songwriters, seems to think they know exactly what it means—until you ask them to define it. As it turns out, the definition of money is anything but straightforward. Many things can function as money and have done so over time. As we shall see, in today’s modern economy many things function as money, and different assets can have different levels of “moneyness.” One of the reasons money does, in fact, make the world go around is because the growth rate of the Money Supply is very important to the proper functioning of a modern-day market economy. Here we examine why this is the case and how difficult it actually is to measure the Money Supply. Finally, one thing we will come back to again and again is the “price of money.” One, but not the only, price of money is interest rates.

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  Monetary Economics

  Policy and its Theoretical Basis

  • Keith Bain, Peter Howells(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  To test for this, we need a clear definition of money and the argument above suggests that this should be a narrow defini-tion. However, if the supply of money is endogenous, the demand for money loses much of its importance and our need for a precise definition of money is also much diminished. In fact, for much of its history, monetary economics has been dominated by the combined assumptions of an exogenous Money Supply and a stable demand for money. This was not because very many economists thought that it provided an accurate description of economies in practice. Rather it derived from the view that the economic system could best be analysed by assuming well-informed eco-nomic agents and markets that tend towards equilibrium. In such a world, cur-rent real income is always at its equilibrium level and this level is known. Savings decisions reflect the long-term choice between the present and future consump-tion (of goods and services), a real not a monetary decision. All savings are The meaning of money 14 Pause for thought 1.5 Can you explain why a stable demand for money implies a stable velocity of money? invested and the level of investment determines the rate of growth of capital stock, which in turn ensures the desired future level of output. The real rate of interest is determined by the actions of savers and investors. The plans of eco-nomic agents are always fulfilled. There is no uncertainty and no scope for pure-ly financial transactions. The monetary authorities determine the rate of growth of the Money Supply. Given the stable demand for money, the control of the Money Supply provides control over the rate of growth of aggregate demand and, with the rate of growth of output determined by real factors, the price level and the rate of inflation. In such a model, money is neutral. We can see this as anoth-er form of the notion that money acts as a veil over the real economy.

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  Money, Banking, Financial Markets & Institutions

  • Michael Brandl(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  These assets have a high level of moneyness. Other assets are less liquid but can still be considered a form of money and are thus included in some measurements of the Money Supply. These various measurements of the Money Supply are called money supplies or sometimes monetary aggregates . These monetary aggre-gates are a way to measure the Money Supply and, more importantly, the growth rate of Money Supply. As we will see, measuring the monetary aggregates is more difficult than it may seem. Monetary aggregates: Broad measurements of the total amount of money within an economic system. Also referred to as the Money Supply or money supplies. 2-3a Monetary Aggregates 4 Over the years, economists have developed a number of different monetary aggregates, or measurements of the Money Supply. Let’s look at what these different measurements are and why so many have been developed. M1 One of the narrowest measurements of the Money Supply is given the fancy name M1. This measurement includes the things we most often think of as “money.” M1 includes currency held by the public and transaction accounts at depository institutions: • Currency held outside the vaults of depository institutions, the Federal Reserve Banks, and the US Treasury 4 For a more detailed discussion of monetary aggregates and their current levels, refer to “Monetary Trends,” published monthly by the Federal Reserve Bank of St. Louis (https://research.stlouisfed.org/publications/mt/). 2-3 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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  India's Economic Prospects - A Macroeconomic And Econometric Analysis

  A Macroeconomic and Econometric Analysis

  • Thampy Mammen(Author)
  • 1999(Publication Date)
  • World Scientific

    (Publisher)

  Chick (1983) points out that there is a revolving fund consisting of consumption and investment spending, and profit and wage income which remain within the banking system as its liability that could finance the existing level of spend-ing. Any higher level of spending in investment or any other spending will necessitate a larger revolving fund that would be met by the banks. (The reason there is a revolving fund is that the short term finance provided by the bank to the producer while goods are being produced will be spent on resources such as labor and returned to the banking system as deposits, with the exception of some leakage into cash or other types of financial as-sets (Wray 1990). Since bank money is created in the process of production or speculation, Money Supply is the result, rather than the cause, of aggre-gate demand (Roger 1989, p. 175). The reason for the stable relationship between income (Y) and money (M), argues Kaldor, is that the causation runs from Y to M and not from M to Y. New money comes into existence in consequence of, or as an aspect of, the extension of bank credit. (Kaldor 1982, p. 22). Expenditures are financed by credit, which raises the level of the Money Supply. So Money Supply is demand-determined. But demand may vary with income, and the Central Bank can effectively influence the level of credit through changes in the bank rate. That, however, does not alter the fact that demand determines the Money Supply (ibid., p. 24). Supply and Demand for Money 157 The central bank cannot control the monetary base except through changing the bank rate at which it creates bank reserves through lend-ing or discounting. But it cannot refuse to lend to the banks without endangering the solvency of the banking system; they must maintain their function as a lender of the last resort, (ibid., p. 25). Moore makes the same argument: The banks first meet the demand for loans and then meet the legal reserve requirement.

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  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  near-banks — i.e., those financial institutions in which the deposits perform almost the same role for depositors as similar deposits in commercial banks. Examples of such institutions are savings and loan associations and mutual savings banks in the United States (USA); credit unions, trust companies, and mortgage loan companies in Canada; and building societies in the United Kingdom (UK). The incorporation of such deposits into the measurement of money is designated by the symbols M3, M4, etc., or by M2A (or M2+), M2B (or M2++), etc. However, the definitions of these symbols have not become standardised, so that their definitions remain country specific.

  Financial institutions in the economy

  Financial institutions are firms involved in the process that determines the Money Supply and interest rates. They also intermediate between the borrowing and lending processes in the economy. In practical terms, financial institutions include the central bank, commercial banks, near-banks such as credit unions, trust companies, brokerage companies, postal banks, pension funds, etc. They do not engage in the production or consumption of commodities but receive funds from some sources and channel them to others (i.e., invests them).

  2.2 Money Supply and Money Stock

  Money is a good, which, just like other goods, is demanded and supplied by the various participants in the economy. There are a number of determinants of the demand and supply of money. The most important of the determinants of money demand are national income, the price level, and interest rates, while that of the Money Supply is the behavior of the central bank of the country which is given the power to control the Money Supply and bring about changes in it.

  The equilibrium amount in the market for money specifies the money stock , as opposed to the Money Supply , which is a behavioral function. These are depicted in Figure 2.1a with the nominal quantity of money M on the horizontal axis and the market interest rate r on the vertical axis. The Money Supply curve is designated as M s and the money demand curve is designated as M d . The equilibrium quantity of money is . It equals the quantity of money supplied at the equilibrium interest rate . Note that the quantity is strictly speaking not the Money Supply, which has a curve or a function rather than a single value. However, is the money stock that would be observed in equilibrium.1

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  Macroeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  And a worldwide shortage of credit in 2007–2009 caused by mortgage defaults in the United States prompted the Fed to supply additional liquidity to the banking system to ensure the orderly functioning of financial markets. Central banks around the world have also begun coordinating their activities, par- ticularly during economic turmoil. For example, in October 2008, during the global financial crisis, six major central banks reduced interest rates in a joint effort to restore financial stability to world markets. Bernanke said he was in frequent contact with other central bankers, including Mario Draghi, head of the European Central Bank. (Incidentally, Draghi, like Bernanke, earned a Ph.D. in economics from MIT.) Although not the main focus of monetary policy, international considerations are of growing importance to the Fed, particularly because of recent fiscal instability in the eurozone. 15-5 Conclusion This chapter has described two ways of viewing the effects of money on the economy’s performance, but we should not overstate the differences. In the model that focuses on the short run, an increase in the Money Supply means that people are holding more money than they would like at the prevailing interest rate, so they exchange one form of wealth, money, for other financial assets, such as corporate or government bonds. This greater demand for other financial assets has no direct effect on aggregate demand, but it does reduce the interest rate, and thereby stimulates investment. The higher invest- ment increases aggregate demand. The effect of this increase in demand on real output and the price level depends on the shape of the short-run aggregate supply curve. In the model that focuses on the long run, changes in the Money Supply act more directly on the price level. If velocity is relatively stable or at least predictable, then a change in the Money Supply has a predictable effect on the price level in the long run.

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  Foundations of Macroeconomics

  Its Theory and Policy

  • Frederick S. Brooman(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Chapter 10 . However, an excess or shortfall of the demand for money against the supply of it is likely to upset any previously existing equilibrium in the rest of the economy, while disturbances in the markets for commodities and labor will themselves upset the balance on the monetary side. What, then, determines the demand for money? To answer this question, it will be convenient to distinguish between the demand for it as a means of payment and the demand for it as a liquid asset (this is, of course, a highly artificial distinction, extremely difficult if not impossible to apply in practice, but it is adopted here merely as an expository device).

  2. The Transactions Demand for Money

  Until the period between World Wars I and II, most economists paid little attention to the demand for money as an asset on the ground that rational individuals would hold only the amounts they needed to make current payments. Since money does not yield interest, an individual who found himself with more of it than he needed for payments purposes would use the surplus to acquire income-yielding assets such as bonds, stocks or real estate; he might even increase his consumption rather than continue to hold a “barren” asset. Consequently, it was argued, the usual effect of an increase in the supply of money would be to raise the level of prices, since the additional money would be financing an increase in the demand for goods and services. Conversely, a reduction in the Money Supply would cause people’s holdings to fall below the level needed for payments, and their efforts to restore their money balances by selling other things would force the price level down. This view, emphasizing money’s means-of-payment function to the exclusion of its liquid-asset role, was formalized as the “Quantity Theory of Money.”6

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  A Systems Perspective on Financial Systems

  • Jeffrey Yi-Lin Forrest(Author)
  • 2014(Publication Date)
  • CRC Press

    (Publisher)

  The key is to derive the general monetary multiplier, which makes the general and narrow Money Supply models different from each other. From knowing this fact, we will focus our attention mainly on the deduction of the general monetary multiplier while we briefly introduce the general Money Supply model. For the money M 2 supply, according to the definition of M 2 , it includes the cur-rency C in circulation, the checking account deposits D , the savings and small-valued time deposits S , and the total F that includes the money markets accounts, money market mutual funds, overnight repurchase agreements, and the overnight European US dollars: M 2 = M 1 + S + F = C + D + S + F (4.18) We further assume that C , S , and F all grow with D at an identical rate. That is, we assume that r c , r d , r e , r s = S / D , and r f = F / D are all constant. Then from D = MB /( r c + r d + r e ), we obtain the following computational formula for the general monetary multiplier m 2 and the supply model of the general money M 2 : m 2 = M 2 MB = 1 + r c + r s + r f r c + r d + r e = m 1 + r s + r f r c + r d + r e (4.19) M 2 = m 2 × MB = 1 + r c + r s + r f r c + r d + r e ( NB + DL ) = M 1 + r s + r f r c + r d + r e ( NB + DL ) (4.20) where the general monetary multiplier m 2 is negatively correlated to r c , r d , and r e , and positively correlated to both r s and r f . Notice that in this discussion the problem for banks to maintain reserves for S and F is not illustrated. In fact, when funds of these two categories flow into banks, through the loan activities between borrowers and banks these funds would be immediately Supply and demand of money 109 converted into checking account deposits. Since D stands for the total of all checking account deposits, it in essence has already included all the checking account deposits that are converted from both S and F . Hence, both r d and r e have already contained the reserves prepared for S and F .

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