US Money Supply

12 Key excerpts on "US Money Supply"

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  eBook - ePub

  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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  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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  Money, Banking, Financial Markets and Institutions

  • Michael Brandl(Author)
  • 2016(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 mea-surements 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 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.

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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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  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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  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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  India's Economic Prospects - A Macroeconomic And Econometric Analysis

  A Macroeconomic and Econometric Analysis

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

    (Publisher)

  Yet it may be worthwhile to capture the economic factors affecting the decisions of the Reserve Bank of India. We present below the traditional money supply function in terms of the monetary base consisting of currency in the hands of the public and bank reserves including cash (B). (6.7) (6.8) Once again either interest rate is significant. In this case the money supply is elastic with respect to the monetary base which may be due to the fact that B and Ml contain C. During the period under consideration C constituted 84% of B. The coefficient of determination of 1 may also be due to this reason. Experiments have shown that disaggregating Ml into Supply and Demand for Money 167 its components can directly bring to bear the tools at the hands of the Reserve Bank to control the money supply. Accordingly we have estimated the following two supply equations. D. Supply of currency and demand deposits (6.9) (6.10) The above two equations relate to supply of currency (CS). In place of RCRG as a measure of deficit, we consider the overall deficit (OD) in Eq. (6.10). It shows very high long run elasticity of supply of currency with respect to both interest rate and overall deficit. This high long run elasticity should be expected because currency is the major component of Ml, and monetization expands currency more than demand deposits. The standard error of the equation is about half that of Eq. (6.9). The high interest rate elasticity is a puzzling result in view of the administered nature of interest rate in general during the major part of the study. The t value for RB in the place of RL in the above equation is 1.91. That equation is, therefore, not presented. (6.11) (6.12) 168 India's Economic Prospects The cash reserve ratio (CRR) is one of the direct tools which the RBI has used frequently in recent years. As expected, supply of demand deposits is inversely related to CRR in both formulations above.

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  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  1 Financial depository institutions also make loans to the government when they purchase government securities for their portfolios. Money Creation 205 price level multiplied by the actual output of goods and services, can be interpreted as the dollar value of output produced in the economy or current GDP. Since the circular flow model tells us that a given level of spending brings forth an output of equal value, we know that MV and PQ are equal. 2 Thus, if the supply of money were $1.5 trillion and velocity were 9, MV (or total spending) would equal $13.5 trillion, as would PQ, the value of the economy’s output. Changing the Money Supply What happens to the level of economic activity when the supply of money changes? The equation of exchange helps answer this question. To keep matters simple, assume that the velocity of money does not change. That is, let V be constant in the equation of exchange. 3 First, we will deal with expanding the money supply. An increase in M causes the left‐hand side of the equation of exchange, or total spending, to increase. Because the two sides of the equation must be equal, the right‐hand side of the equation, the dollar value of output, must increase by the same amount. If the economy is not operating at full employment and production, the increase in the value of output comes primarily in the form of an expansion in production and employment. That is, the increase on the right‐hand side of the equation of exchange would come mainly in the Q term. However, if the economy were at or near full employment, production and employment would be at or near their upper limits. Under these circumstances, Q in the equation of exchange could go up very little, if at all. At full employment, an increase in the money supply would lead primarily to an increase in the price level, the P term, or to inflation. A decrease in M decreases total spending, the left‐hand side of the equation of exchange.

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  eBook - ePub

  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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  Macroeconomics

  A Contemporary Introduction

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

    (Publisher)

  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. Chapter 14 Banking and the Money Supply 325 Key Concepts Checkable deposits 306 Money aggregates 306 M1 306 Savings deposits 308 Time deposits 308 M2 309 Debit card 310 Asymmetric information 312 Net worth 313 Balance sheet 313 Asset 313 Liability 313 Required reserves 314 Required reserve ratio 314 Excess reserves 314 Liquidity 315 Federal funds market 315 Federal funds rate 315 Money multiplier 318 Simple money multiplier 318 Open-market purchase 321 Open-market sale 321 Discount rate 321 Questions for Review 1. Money Aggregates What are the two measures of the money supply and how is each measure defined? 2. Money Aggregates What portion of Federal Reserve notes circulate outside the United States? How does this affect the United States? 3. Case Study: Faking It Why did the U.S. government consider it important to redesign the $100 note? 4. Money Aggregates Determine whether each of the following is included in the M1 or M2 measures of the money supply: a. Currency held by the nonbanking public b. Available credit on credit cards held by the nonbanking public c. Savings deposits d. Large-denomination time deposits e. Money market mutual fund accounts 5. Banks Are Financial Intermediaries In acting as financial in- termediaries, what needs and desires of savers and borrowers must banks consider? 6. Money Aggregates Suppose that $1,000 is moved from a sav- ings account at a commercial bank to a checking account at the same bank. Which of the following statements are true and which are false? a.

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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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  Money and the Global Economy

  • Alexander Reed(Author)
  • 1998(Publication Date)
  • Woodhead Publishing

    (Publisher)

  Next, the regulators add certain time deposits and perhaps saving deposits to Ml and arrive at a total of effective money plus some quasi money, calling this M-two (M2). Depending on political and economic objectives, the so-phistication of available financial data and possible controls, some systems go on to M3, M4, etc. Ml, M2, M3, etc are referred to 10 WHAT MONEY IS collectively as monetary aggregates. Since a nation's money supply can be intimately related to a nation's economic health, many monetary authorities set predetermined objectives as to the growth or contrac-tion of these monetary aggregates over future periods by controls and influences on their financial markets. International money Moneys used for international payments have had a capricious history. The first objects so used were probably bars and balls of metal, then clay and slate tablet bills of exchange and later stamped coins. The coins have included silver ones of Greek city states, then similar Roman coins, next the Byzantine Empire's gold solidus (referred to by modern historians as the 'dollar of the Middle Ages'), dinars from some Arab states, Italian silver in the twelfth century and, finally, the more recent British sovereign, Austrian Maria Theresa dollar, Indian silver rupee and the American gold double eagle. Gold in simple bar form has nearly always been accepted as international money because of its scarcity, uniformity, durability, attractiveness, reasonably stable price over long periods and high value in a small space. Most countries keep a stock of it as part of their international reserves, more from tradition than common sense, since gold earns no interest, fluctuates in price, carries storage charges and is little used to settle cross-border accounts. Today, as throughout history, there is no international money in the sense of one money in common, daily use all over the globe.

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