SUPPLY OF MONEY AND FACTORS AFFECTING ITS DISTRIBUTION,
Definition: The supply of money refers to the total amount of money available for use in the economy at a given period of time.
The supply of money, often referred to as the money supply, is the total quantity of money available within an economy at a particular point in time. It includes all forms of money that are widely accepted as a medium of exchange, store of value, and unit of account.
The money supply is a crucial concept in economics and is typically classified into several categories or “monetary aggregates” based on their liquidity and accessibility.
These categories are usually labelled as M0, M1, M2, and M3, although the specific definitions may vary from one country to another. Here’s a general overview of these categories:
- M0 (Narrow Money): M0, also known as the monetary base or the central bank money, represents the most liquid form of money and includes:
- Physical currency (coins and paper money) held by the public.
- Commercial bank reserves with the central bank (required and excess reserves).
- M1 (M0 + Demand Deposits): M1 expands upon M0 by including a broader range of assets that can be quickly converted into cash for transactions. It includes:
- All components of M0.
- Demand deposits (checking accounts) are held by individuals and businesses, and can be accessed through checks, debit cards, and electronic transfers.
- M2 (M1 + Savings Deposits and Small Time Deposits): M2 includes a wider range of assets that are less liquid than M1 components but are still considered part of the money supply. It consists of:
- All components of M1.
- Savings deposits are interest-bearing accounts with no fixed maturity date.
- Small-time deposits (certificates of deposit or CDs) with a denomination typically less than a specific threshold.
- M3 (M2 + Large Time Deposits and Other Near-Money Assets): M3 is the broadest measure of the money supply and includes:
- All components of M2.
- Large-time deposits (CDs) and other near-money assets, such as money market mutual funds, are easily convertible to cash but may have restrictions or maturity dates.
It’s important to note that the definitions and classifications of these monetary aggregates can vary by country and over time. Central banks and financial authorities monitor the money supply and may adjust their definitions and reporting practices accordingly.
The money supply is a critical factor in macroeconomic analysis and monetary policy.
Central banks use various tools to influence the money supply to achieve specific economic goals, such as controlling inflation, promoting economic growth, and maintaining financial stability.
By regulating the money supply, central banks can influence interest rates, inflation rates, and overall economic activity within an economy.
The supply of money involves the currency in the form of banknotes and coins circulating outside the banking system as well as the bank deposits in current accounts, which can be withdrawn by cheque (i.e. bank money
forms of money
there are about three forms of money as taught us during my school days but today there are various forms in which money can be seen in circulation and we were also taught the trade by barter. for the records, money can be found in the form of bank notes, coins and commodities.
but in today’s world, you will find money in the following forms for doing business and general merchandise.
so we have bank notes, electronic money, commodity forms of money, coins, debentures, drafts, and cheques which can serve as a means of doing business or transactions, in facilitating international trade or paying bills electronics or wire is key key to making payment
There are different types of money in the world economy, these forms are as follows: Fiat, commodity, representative, fiduciary, and commercial bank money as known as banknotes
Electronic money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer
MONEY: DEMAND FOR AND SUPPLY OF MONEY.
Identify the various motives for holding wealth in the form of money Explain the elementary quantity theory of money Identify the determinants of the supply of money Explain how changes in the price level affect the purchasing power of money.
FACTORS AFFECTING THE SUPPLY OF MONEY
Bank rate: The bank rate is the rate of interest which the Central Bank charges the commercial (functions of the central bank) banks for lending money to or from them and discounting their bills.
If the bank rate is high it will discourage banks from borrowing, and discounting of deposits commercial banks are expected to keep with them.
Assuming that the
cash reserve is high, the supply of money
Cash reserve: Cash reserve, also called cash ratio, is the percentage of the deposits commercial banks are expected to keep with them. Assuming that the cash reserve is high, the flow of money will definitely be low and vice versa.
Economic situation: During the period of inflation in an economy, the central bank will reduce the supply of money and increase it during the period of deflation.
Demand for excess reserves: When commercial banks demand for excess reserves, the supply of money will increase.
Total reserves of the central bank: The flow of money is affected by the total reserves of the central bank. If the total money supplied by the central bank is high money supply will also be high, and vice versa.
- population
- market concept
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