Supply of money

THE CONCEPT OF MONEY THE CONCEPT OF MONEY SUPPLYSUPPLY

Money supply – the liquid assets held by the Money supply – the liquid assets held by the banks and individuals.banks and individuals.

Those assets includes all the money held in Those assets includes all the money held in circulation and in banks or other financial circulation and in banks or other financial institutions.institutions.

CONCEPT OF MONEY SUPPLYCONCEPT OF MONEY SUPPLY

• too much money rise in price – leads to INFLATION

• less money fall in price – leads to DEFLATION and slows the growth of economy.

•If economy slows too much commerce spirals, jobs are lost, less and less money moves………

MEASURING THE MONEYMEASURING THE MONEY

•Liquidity is the measure of how quickly things can be converted into something of value. (gold, cash…)

•Liquidity is variable.

MEASURING THE MONEYMEASURING THE MONEY

M1 - money that can be spent immediately M1 - money that can be spent immediately (currency)(currency)

M2 - all the money in M1 plus short term M2 - all the money in M1 plus short term investment (savings account)investment (savings account)

M3 - all the money in M1 M2 plus large M3 - all the money in M1 M2 plus large deposits (agreements between banks and deposits (agreements between banks and financial institutes)financial institutes)

MZM – money at zero maturity level.MZM – money at zero maturity level.

CREDIT CREATION BY CREDIT CREATION BY COMMERTIAL BANKSCOMMERTIAL BANKS

• Commercial banks just like central bank of the country cannot create money, but they create money through deposit creation.

• Deposit are created in two ways:

1.Primary deposits

2.Secondary deposits

PRIMARY DEPOSITSPRIMARY DEPOSITS

Primary deposits are created when Primary deposits are created when customers deposit their cash with the bank. customers deposit their cash with the bank. The same amount is credited to their The same amount is credited to their accounts.accounts.

Consequently they do not make any net Consequently they do not make any net addition to the total stock of money in the addition to the total stock of money in the economy but they bring cash to the bank.economy but they bring cash to the bank.

SECONDARY DEPOSITSSECONDARY DEPOSITS

Whenever bank buy assets from the market Whenever bank buy assets from the market or lend to business men, it does not give or lend to business men, it does not give them cash but creates demand deposits in them cash but creates demand deposits in their names. These deposits are derived their names. These deposits are derived from primary deposits. Hence they are from primary deposits. Hence they are known as derivative deposits.known as derivative deposits.

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