Thursday, May 23, 2013

Monetary and Fiscal Policies (2066Q5): Explain precisely the concepts of money supply, high powered money and money multiplier and also identify the determinants of money supply.

Money Supply
Money Supply or Money Stock is the total amount of monetary assets available in an economy at a specific time. Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its effects on the price level, inflation, the exchange rate and the business cycle.

High Powered Money
In the context of supply of money, the concept of high powered money is more prevalent in modern time. In the context of purchasing power of money, there are two types of money.
1.     High Powered Money
2.     Low Powered Money

High Powered Money indicates the purchasing power of supply of money. The total purchasing power of people depends on the growth rate and quantity of total supply of money.

The increase in volume of money creates purchasing power in more or less degree. The increase in supply of money that generates more purchasing power is called high powered money. Financial institutions should take high powered money into consideration to schedule stability in the country along with development.

Money supply = (Monetary base) x (Money multiplier)

Money Multiplier
The money multiplier (also called the credit multiplier or the deposit multiplier) is a measure of the extent to which the creation of money in the banking system causes the growth in the Money Supply to exceed growth in the Monetary Base.

The multiplier is the multiple by the expansion in the money supply is greater than the increase in the monetary base: if the multiplier is 10, then a Rs. 1 increase in the monetary base will cause a Rs. 10 increase in the money supply.

Determinants of Money Supply
Main determinants of the supply of money are
  1.   Monetary base
  2.  Monetary multiplier

These two broad determinants of money supply are influenced by a number of other factors. Various factors influencing the money supply are:-
  1. Monetary Base
  2.  Money Multiplier
  3.  Reserve Ratio
  4.  Currency Ratio
  5.  Confidence in Bank Money
  6. Time-Deposit Ratio
  7. Value of Money
  8.  Real Income
  9. Interest Rate
  10. Monetary Policy
  11.   Seasonal Factors

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