Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Money supply - Essay Example

Comments (0) Cite this document
Money can be held in three common forms; paper money, metallic coins and money deposits to banks. Measurement of money supply is a critical act and various ways have been developed by economists to measure the level of money supply in the economy…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER92.5% of users find it useful
Money supply
Read TextPreview

Extract of sample "Money supply"

Download file to see previous pages Money can be held in three common forms; paper money, metallic coins and money deposits to banks. Measurement of money supply is a critical act and various ways have been developed by economists to measure the level of money supply in the economy. The high-powered money multiplier approach is an approach that considers the level of bank deposits by the private sector while determining money supply (Werner, 2005). According to this approach, the level of cash deposits held by the bank plays the major role in determining money supply. High-powered money multiplier approach to credit creation The high-powered money multiplier is denoted by the letter ‘H’ and is measured in terms of the summation of notes and coins held by the common population (C) and notes and coins held by the banks plus deposits maintained by banks at the central bank (R). The mathematical formula for the stock of high-powered money: H = C + R The level of money supply (M.S.) in an economy is measured by: M.S. = C + D; where C denotes notes and coins held by the common population and D denotes bank deposits made by private individuals or agents (D'Souza, 2009). We can represent money supply in terms of the stock of high-powered money (denoted by ‘H’) and the high-powered money multiplier (denoted by ‘h’). The formula for high-powered money multiplier can be derived from the formula for the stock of high-powered money and the high-powered money multiplier (D'Souza, 2009). M.S. = C + D -----------(1) H = C + R ------------(2) On dividing equation (1) by equation (2) we get equation (3): On dividing the numerator and denominator of the right hand side of equation (3) by D we get: Or, Or, Or, M.S. = h* H (7) Where, Therefore, M.S. = h* H, i.e, the level of money supply in the economy is the product of the high-powered money multiplier (h) and the stock of high-powered money (H) (D'Souza, 2009). A number of assumptions are made prior to the development this model measuring money supply. These assumptions have been described below: Firstly, the stock of high-powered money (H) is considered as exogenously determined. It is not dependent on the functioning of the market forces. Secondly, C/D ratio is either a constant or is stable and predictable. If the rates of return on these investments remain constant, then the ratio of C/D would also remain constant. However, in reality, bank deposits offer interest rates whereas cash holding does not. Therefore, households as well as firms would be interested to make more deposits than hold liquid money. Thus, the C/D ratio is not a constant, but, is predictable. Sometimes the C/D ratio becomes unstable and unpredictable due to changes in financial culture of the economy or high end technological innovations and changing trend in spending methods towards use of plastic money (mostly due to technological advancements) leafing to a fall in C/D ratio or lack of confidence on the banking system in the economy leading to an increase in liquid money holding and a subsequent rise in C/D ratio. The final assumption is related to the R/D ratio. It is the ratio of the reserves held by the banks at the Central bank and the liabilities of the bank and is considered as stable and predictable. The banks often try to keep a high reserve with the central bank by acting in a risk-averse manner in order to protect itself in a situation of large sudden withdrawals by depositors. However, depending on the rate of interest, banks decide the amount of money they would hold as interest bearing asset and the amount they would hold as reserves (earning no interest). The stock of high powered money also changes due to the change in government policies or total liabilities of the central bank and daily operations of the central banks. Change in high powered money is denoted by ?H. The value of ?H is given by the following equation: Or, ?H = DEF – ?GD + ET + MMA Where, Budget deficit (DEF), net sales of ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Money supply Essay Example | Topics and Well Written Essays - 1750 words”, n.d.)
Money supply Essay Example | Topics and Well Written Essays - 1750 words. Retrieved from
(Money Supply Essay Example | Topics and Well Written Essays - 1750 Words)
Money Supply Essay Example | Topics and Well Written Essays - 1750 Words.
“Money Supply Essay Example | Topics and Well Written Essays - 1750 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


The relationship between price and Money Supply

... met The monetary base The two components of money supply are monetary base and money multiplier. Monetary base includes the reserves and the outstanding currency of the economy. It comes in the asset side, in the balance sheet, of the central bank. It links the central banks to the other measures of the money supply. So we can say that money supply involves the reserves of the banks with the central banks and the currency circulated in the market It is very important to understand the factors influencing the size of the monetary base of the countries. It simply means the available funds and cash reserves of the central banks. The size of the monetary base usually depends on two factors: The Gold stock and the reserve assets with the bank...
12 Pages(3000 words)Research Paper

Relationship between money supply and the inflation

... into the growth. What is actually however, discussed that the higher money supply can result into higher prices and thus if money supply is increased, it will create inflation in the economy and will hurt the real economic growth. This is because of the fact that higher inflation level decreases the purchasing power of money quickly. (Sloman, Hinde, & Garratt, 2010) How this relationship between money supply and inflation evolves and how actually the increase in money supply results into the inflation or general increase in price level is what will be discussed in this paper. The first section of the paper will discuss how the money supply is increased or decreased in the economy besides discussing what inflation is. Subsequent sections...
4 Pages(1000 words)Essay

Money Supply

...; this will automatically trigger a money supply increase. This is the same way an increase in the discount in the discount rate will have an opposite effect on the money supply. Question 2: Discuss the factors that led to deregulation of the U.S financial markets in the 1980s. Deregulation can be described as the process where there are adjustments made to the law. What this means is that financial institutions will have more freedom in the way that they compete. Deregulation, therefore, is the process where regulations are reduced or at times removed to increase the efficiency of markets. The reason behind deregulation is promotion of competition. It will result in low...
3 Pages(750 words)Essay

The Real Money Supply

... is national saving. d) TRUE: Multiplier effect is the effect of a change in investment on income ‘Y’. It was true that if consumption and investment are exogenous the Keynesian multiplier equals one Question three If there is an increase in deposits of bank reserves will lead to less money supply. IS curve-It combines the equilibrium levels where the commodity market is at equilibrium. If interest rates go pup, then the gross domestic product (GDP) goes down. If interest rates go down, the level of GDP goes up LM curve- it joins together combinations of the rate of interest and national income at which the monetary sector is at equilibrium. IS curve – Joins the combinations of rate of interest and levels...
2 Pages(500 words)Essay

Money Supply

... within an economy. The narrowest measure of money supply is M0, which is the total of all physical currency (paper, coins), plus central bank accounts that can be exchanged for physical currency. In other words M0 shows how much cash with public are in the country. M1 includes M0 and the total of deposit balances without any withdrawal limitations. Interesingly M0:M1 ratio is often used to determine the ratio of cash with public to total financial accounts. M2 consists of M1 and most of saving accounts, money market accounts and certificates of deposit of under $100,000. Finally, M3, the largest money supply aggregate includes M2 and other time deposits and repurchase agreements. As can be seen all the money aggregates are focused on forms...
3 Pages(750 words)Essay

Macroeconomics. Unexpected changes in the money supply ASCII text. and Multiple line equation(s) cannot be represented in ASCII text. where Mst is the (exogenous and constant, because tau = O) money supply at the end of period t asset markets and lambda is the current-value Lagrange multiplier on constraint. (It is easy to show that lambda = gamma the multiplier on the cash-in-advance constraint, because of the first-order condition for the choice of Mt.) It is also easy to show that the nominal interest rate on a one-period nominal asset satisfies the usual pricing condition: Multiple line equation(s) cannot be represented in ASCII text. Equilibrium When Some Prices Are Sticky This section examines the implications of the basic model when prices...
15 Pages(3750 words)Essay

Bank (money supply)

... of factors, one of them may be a sudden increase in population, as mentioned above. As a result of a new demand curve, the price has also move up from P1 to P2. An important point to note here is that, while the price has moved up along with the demand, quantity sold has not changed that much, when compared. This is because of the fact that the supply for property is always inelastic due to the time gap between the change in price and the increase in supply. Other reasons behind a change in property prices can be Mortgages. A mortgage is the money borrowed to buy a house, as for most people buying a house is not easy. Over the years mortgage market has picked up greatly and the current scenario is totally different from the one...
10 Pages(2500 words)Essay

Inflation and the Money Supply

.... The sources of this theory lie with Monetarist economists. Milton Friedman observed that, "Inflation is always and everywhere a monetary phenomenon," (Milton Friedman, 1987). The theory of inflation takes up the Quantity Theory of Money to propose that if the amount of money in the economy grows faster than the growth in the level of possible output, then this will affect upon the prices. In other words if the money supply grows too fast there will be inflation. The broad aim of this essay is to bring out the knowledge of the basic theory concerning the relationship between the growth of money supply and inflation in an applied context. This will demonstrate a clear understanding of both narrow and broad measures of the money supply...
9 Pages(2250 words)Essay

E-logistics and Supply Chain Management: Tesco

...1. Supply Chain management (SCM) involves integrating all the functions to maximize benefits and reduce costs. SCM includes the logistics flows, thecustomer order management, the production processes, and the information flows necessary to monitor all the activities at the supply chain nodes (Swensson, 2003). has adopted the expansive strategy by including non-food items in its list and ensures proper coordination between all its processes in the supply chain. Tesco uses the latest technology which enables to shop any time from anywhere through the use of handheld computers and WAP-based wireless phones, internet, pocket PCs or digital TV. They have also opened up Internet cafes in stores to facilitate the customers with poor...
6 Pages(1500 words)Assignment

Strategic Opportunities for E-commerce Enabled Supply Chains

Scaling the e-business in IT infrastructure is important because it reduces the cost and expenses to interact with the customers and suppliers. It also helps in maintaining and in management of the e-business. 

“As your environment begins to evolve, it is important to recognize the value of horizontally scaling your platforms and applications to support increased loads and service requirements. As the concurrency and complexity of your systems grow, the greater the need becomes to support policy-based routing, application and data caches, as well as load balancing hardware and software.” (Whitepaper; August 2001)

From very starting there was a need for those applications that can be used to c...
9 Pages(2250 words)Report

How Can CRM Strategies Improve Efficiency and Effectiveness in Supply Chain Networks to Enhance Competitive Advantage

... CRM and Supply Chains How can CRM strategies improve efficiency and effectiveness in supply chain networks to enhance competitive advantage? Provide real life example to support your case With globalisation and the growth of a shared market across the world, it is very important for all brands to have individual recognition and be accepted as a part of the local scene as much a small business would be (Harker and Esan, 2006). While this is often the target of marketing executives, it is often found that customers may have different relationships with brands and the strongest customer relationships survive even when if product quality goes down or even if the competition offers a better deal (Tenser, 2006). In essence, the relationship...
6 Pages(1500 words)Assignment

Money & Capital Markets

The subprime lending crisis rocked the U.S. economy in late 2006 and early 2007. Subprime lending refers to the loans which are provided to the borrowers having less than ideal credit histories. In other words, subprime lending is provided to persons who do not qualify for conventional credits or loans.

The subprime loans gave rise to inflated credit facilities, increased availability of infrastructure and more circulation of more currency in the economy. But this system also gave rise to unprecedented meltdown, liquidation of funds and resultant heavy losses of financial institutions due to non-payment of loans by the borrowers.

The main reasons for the crisis are more than one. They are the failure of the b...
10 Pages(2500 words)Assignment

American Airlines: Supply Chain Nightmare

For this reason, it is necessary that all business sectors are carefully reviewed – as often as possible – for the appropriateness of their structure and their daily needs; managers may fail to evaluate with accuracy their firm’s needs, a fact that can cause the failure of plans applied on the relevant organization (Hardless, 2005). On the other hand, the needs of various organizational departments are different; the methods used for the improvement of a firm’s activities should be flexible taking into consideration the characteristics of the specific organizational sector, its strengths/ weaknesses but also its role in the development of the firm’s activities. Boeing is a firm with a long presence in...
15 Pages(3750 words)Case Study

Setting Targets for the Money Supply

... as the orthodox Keynesian economic policies were unable to prevent economic stagnation, rising inflation, and the slow re-emergence of high rates of unemployment (Smith, 2003 p.10). Even today there are various central banks that claim to be attempting to control the money supply within their respective national economies. For instance: “The Bank of England's two core purposes are monetary stability and financial stability. Monetary stability means stable prices - low inflation - and confidence in the currency and financial stability entails detecting and reducing threats to the financial system” ( The majority of central banks such as the European Central Bank, the United...
9 Pages(2250 words)Term Paper

Relationship between Money Supply and Inflation in Saudi Arabia

Over the recent past, the effects of money supply, debt and inflation have become contentious issues for debate. Furthermore, frequent cautions concerning the risk of very large budgetary deficits aver that this would send up the upcoming state debt and capital rate as indicated by the rates (interests). As a nation, Saudi Arabia has a bi and enduring budgetary deficit over the past two decades and the government has been forced to go into the market so as to have loan access and to make up for the deficits. Given the impact of this on inflation and other economic variables, it's imperative and of great alarm for strategy architects (strategists) to understand how microeconomics has an effect on money supply, financial plan defici...
10 Pages(2500 words)Speech or Presentation

Money Supply Process

... to sketch out standards for the calculation of the amount of money in an economy. According to the IMF’s guidebook, money supply is calculated as the joint deposit liabilities of the banking system and the currency liabilities of the central bank. They are held by households, companies, non profit organizations and all public sector entities outside of the central government. In this authorized or standard illustration of money supply, there are 3 monetary aggregates defined; M0, M1 and M2. There are other less liquid financial assets, which suit the store of value condition and their incorporation allows for extensive measurements, for instance, M3 and M4 (The Measurement of Money Supply, n.d., p. 9-11). Table 1: Standard Measurements...
8 Pages(2000 words)Assignment

Supply Chain Management: Conceptual Supply Network

...Supply Chain Management Introduction A basic collective definition of supply chain are thrice some time more accordingly, these are the firm’s dual equipped transitional informing, capital, assistance for providing goods, and commodity availability destination of consume. (Mentzer et al., 2001). In simpler words a supply chain is the cooperation among companies or organizations in order to improve the cumulative as well as individual performances. A supply chain is a basic element of the growth or manufacturing period. So far both could not work without it. Recent development in this era of new business strategies that must minimize risk in business by using friendly environment machinery , social acknowledgement as requirement...
8 Pages(2000 words)Term Paper

Logistics and Supply Chain Strategy

Sustainability increases the mode of rail and sea freight and intermodal transport. The demand characteristics in some cases influence the choice of transport mode and even the need for safety stocks. The appropriate logistic strategy is essential for any organization as the manufacturing lead time is affected by the product characteristics and design. Globalization is a factor that causes longer lead times as a result of longer distances (Chan and Lee, 2005, p.78). The basis for any logistic strategy is the product. The product pricing is affected by the choice of transport mode. The production flow is smoothened with good demand predictability. Demand predictability is improved with the help of information technology through gre...
6 Pages(1500 words)Assignment

Purchasing and Supply

In numerous industrial sectors, the trend has been moving away from adversarial or arms-length supplier relationships to relational or obligational contracting forms of relationship, such as outsourcing. Boeing is one company that has embraced this trend as evidenced by the production of its 787 Dreamliner aircraft. As a way of reducing their aircraft timeline to 4 years from 6 years, Boeing began to outsource parts and to sub-contract other companies internationally. However, as stated by Brandes et al (1997), outsourcing tends to have the most success if it is based on strategic decisions including cost efficiency and core competency considerations, instead of being solely prompted by financial troubles. 
Whereas Boein...
6 Pages(1500 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Money supply for FREE!

Contact Us