If these two criteria are applied, none of the three definitions is wholly satisfactory.The first definition of money supply may be analytically better because MThe second definition that includes time deposits (MNormally, it cannot be withdrawn before the due date of expiry of deposit. Commercial bank reserves consist of reserves on deposits with the central bank and currency in their tills or vaults. If m is fairly stable, the central bank can manipulate the money supply (M) by manipulating H. The central bank can do so by open market operations.
An increase in the required reserve ratio reduces the supply of money with commercial banks and a decrease in required reserve ratio increases the money supply.But the short-term assets along with the cash are regarded as the liquid assets of a commercial bank.
So time deposits possess liquidity and are included in the money supply by Friedman. This is shown in Figure 69.2. If the money supply is larger than this, say OMIf there is an increase in any one of the ratios Cr or RRr or ERr, there would be an increase in the demand for high-powered money. Changes in business activity can change the behaviour of banks and the public and thus affect the money supply. Hence the money supply is not only an exogenous controllable item but also an endogenously determined item.We have discussed above the factors which determine money supply through the creation of bank credit.
This is shown by the Hd’ curve in Figure 69.1 where the increase in the demand for high-powered money leads to decline in the money supply to OM.The quotient of equation (7) is the money multiplier m. ThusNow the relation between the money supply and high -powered money of equation (7) becomesEquation (9) expresses the money supply as a function of m and H. In other words, the money supply is determined by high powered money (H) and the money multiplier (m).
2 weeks ago This is to meet unanticipated cash withdrawals or adverse clearing balances.
The central bank requires all commercial banks to hold reserves equal to a fixed percentage of both time and demand deposits.
Thus time deposits lack perfect liquidity and cannot be included in the money supply. Thus high-powered money H=C+RR+ER where С represents currency, RR the required reserves and ER the excess reserves.A commercial bank’s required reserves depend upon its deposits. The currency ratio is influenced by such factors as changes in income levels of the people, the use of credit instruments by the public, and uncertainties in economic activity.The formal relation between the money supply and high-powered money can be stated in the form of equations as under:The money supply (M) consists of deposits of commercial banks (D) and currency (C) held by the public. A usability evaluation framework for b2 c e commerce websites
It is the central bank of the country that influences the reserves of commercial banks in order to determine the supply of money.
If people are in the habit of keeping less in cash and more in deposits with the commercial banks, the money supply will be large. High-powered money is the base for the expansion of bank deposits and creation of the money supply.
I absolutely agree with the above.
Such deposits earn a fixed rate of interest varying with the time period for which the amount is deposited.
Your message goes here Thus with every increase in the money supply, the bank credit goes up.
It tends to expand credit and the consequent bank reserves.It should be noted that commercial bank reserves are affected significantly only when open market operations and discount rate policy supplement each other. The supply of money varies directly with changes in the monetary base, and inversely with the currency and reserve ratios. Thus the currency ratio C/-C/D, where С is the currency and D deposits.
Money stock determinants high powered money and money multiplier
According to them, due to uncertainties prevailing in banking operations as in business, banks always keep excess reserves. The last two determinants together are called the monetary base or the high powered money.The required reserve ratio (or the minimum cash reserve ratio or the reserve deposit ratio) is an important determinant of the money supply. This raises the high-powered money in the form of excess reserves of banks.An increase in money supply that results from it comes from the banking system which creates new money on the basis of its newly acquired excess reserves. High powered money is also known as secured money (RM) because banks keep with them Reserve Fund (R) and on the bases of this Demand deposits (DD) are created. The second view holds that the money supply is determined endogenously by changes in the economic activity which affects people’s desire to hold currency relative to deposits, the rate of interest, etc.Thus the determinants of money supply are both exogenous and endogenous which can be described broadly as: the minimum cash reserve ratio, the level of bank reserves, and the desire of the people to hold currency relative to deposits.
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