...1 Group Project: The Money Supply By David Rathbun Prof. Dr. David Bouvin The analysis of the money supply is usually calculated by each individual countries central bank. These liquid assets include are considered the total number of monetary assets available for an economy at a specific time. This can be complicated but in analysis becomes quite simple. The United States uses M0 thru M3 and includes MB and MZM. Starting with M0 which is this is the most liquid assets easily spendable funds cash and coins outside of Federal Reserve Banks and the vaults of depository institutions. Countries differ on what is constitutes M1 and in fact the United Kingdom does not use M1 at all for their money supply. The United States calculates M1 as the total amount of cash/coins outside of the private banking system plus the amount of demand deposits, travelers checks and other check related deposits. Items not included in M1 are items such as savings accounts and stocks. These two financial transactions are considered part of M2 due the assets being less liquid. [1] Money supply M1 in the United States has increased to 2534.70 USD billion in May of 2013 from 2523.20 USD billion in April 2013.[2] M2 is calculated by adding up M1 and other less liquid funds such as most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificate of deposits under $100,000).[1] Money Supply M2 In the United States has...
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...2013 The Control of Money Supply & Demand of Money Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will focus on where it comes from and how inflation effects it. In the book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, he explains liquidity factors in economic interest rates that balance supply and demand for money. There are two different types of interest rate that help explain, in monetary terms, how much borrowers pay for borrowed funds. Generally, during a period of inflation where prices increase, nominal interest can be misunderstood. As the nominal interest rate rises or falls, it can be misleading as to how much the borrower is truly borrowing and how much the lender is receiving. When the borrower repays the principle loan, they lender may not be able to purchase as much goods and services, then when originally loaned. This is because when the loan was initially issued the money was worth more than...
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...bank, every economy relies on an agency to regulate its monetary system. With a set responsibility to regulate the money supply within the economy, the bank of England is the legal entity with the authority to control the money available in the country. The bank of England (BoE) is likely to raise the interest rate over the coming years. There are several policies in which a country can resort to in order to accomplish this. These actions taken are known as monetary policies. Some of these tools include open market operations, refinancing rate, and reserve requirements. First, it is important to understand the relationship between money supply and interest rates in an economy. An interest rate is known as the amount of money a borrower is charged by a lender over the value of the loan they have taken. The interest rate is determined in a money market. Money supply is fixed by the central bank shown In figure 1, fixed at (Sm). The demand for money slopes downward as it illustrates the negative relationship between the quantity demanded for money and the interest rate. The interest rate is determined by the intersection of the supply of money (Sm) and the demand for money (Dm). In attempt to increase interest rates in the economy, the bank of England must use contractionary monetary policies that will decrease the money supply in the economy. Once money supply is decreased it will shift left to Sm(2). As result interest rate will rise to meet a new equilibrium of IR(2),...
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...How does Federal Reserve Control the Money Supply? Federal Reserve or simply “the Fed” is an independent entity whose main goal is to provide the nation with a safer, more flexible, and more stable monetary and financial system. It is the central bank of the United States that influences the monetary policy by controlling the money supply and cost of money in able to give the economy full employment, low inflation rate, and stable prices. Manipulating money supply is a very powerful tool use by the Fed to stabilize the economy. So how does the Federal Reserve control the money supply? The Fed uses three different methods to increase or decrease the amount of money supply in the economy. The first method is by conducting open market operations, which affects the federal funds rate. In open-market operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system. Open-market operations are the most important tool that the Fed can use to influence the money supply. Perfect example was during the recession of 2007 – 2009. The primary tool that the Fed used early during the current crisis was to cut the Federal Funds rate. The Fed initially conducts...
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...The effect of an increase in the money supply (expansionary monetary policy) Let's start with an economy in long run equilibrium, with the price level equal to that anticipated by decision makers. The long run equilibrium is shown by the green dot (1) with the price level at 105. If starting from this situation, the Fed increases the money supply, banks will increase their lending activity. When the supply of loans goes up, the real interest rate will fall. As the interest rate falls, aggregate demand will increase (move to the right). The following short run equilibrium results. In this short run equilibrium, which is shown as point (2): 1. the price level is higher than what was expected (it’s 110 instead of 105) 2. the price level is higher than in the (previous) long run equilibrium 3. as a result of the higher price level, producers will produce more output in the short run than in the previous long run equilibrium, since resource costs will not keep up with the higher price level for products (see below) 4. output (real GDP) will be higher than in long run equilibrium (and higher than the potential, sustainable, full employment level). 5. employment is greater than full employment 6. unemployment is lower than the natural rate (this can occur temporarily) 7. cyclical unemployment is negative (which can happen temporarily) 8. the real values of wages and resource prices will be lower than their lower than their long run equilibrium levels (due to the higher...
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...amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession. The Federal Reserve The Federal Reserve uses three main tools in order to control the money supply. The first tool is open-market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue, 2004, p. 252). By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks that in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy. The second tool in the Federal Reserve’s arsenal is the adjustments of reserves ratio. The reserves ratio is the required amount in which a bank must have at all times. By raising or lowering the reserve ratio, the Federal reserves can expand or limit how much a bank will loan out money. If the fed decides to lower the ratio than banks will have more money to give out in loans. The same goes the other way, if the fed raises the required reserve than banks will have less money to loan...
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...action the Federal Reserve will take along with how they achieve their goal. The Federal Reserve The Federal Reserve System, often called the Federal Reserve or simply put as The Fed, is the central banking system of the United States. Founded in 1913 by the Federal Reserve Act in response to major financial panics, The Fed has assumed more responsibilities and evolved into a regulatory super bank. Its major duties include but are not limited to; creating monetary policies, supervising and regulating banking institutions and maintaining the stability of the financial system. Today we treat The Fed as a financial guru for when the economic stability of our country seems unusual. The Money Supply The money stock, or more commonly known as the money supply, is the total amount of money available in an economy at a particular point in...
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...emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand). (ii) cash reserve ratio Second is the changes in the reserve requirements or cash reserve ratio. It is an instrument that. BNM controls the inflation by increasing the reserve ratio. Cash reserve ratio is a Central Bank regulation that sets the minimum reserves each commercial bank must hold to customer deposits and notes. manipulate the reserve ration in order to influence the ability of commercial banks to lend. When the economy is overheating and the threat of inflation is high, monetary policy will be tightened by withdrawing funds from the banking system and raising interest rates. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit. Commercial bank will lost excess reserves >> diminishing their ability to creat money by lending >> commercial bank may...
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...try to influence either the supply of money or the price of money, as given by the rate of interest. Instruments of Monetary Policy. The instruments are what the Bank can directly manipulate in an effort to achieve its goals. The main instruments used are: 1) the purchase and sale of financial assets (mainly government securities) in the open-market, so called “open market operations” which directly affect bank reserves: 2) The rate at which it will offer credit to the banking system (interest rate). How Does Monetary Policy Work? 1. Open Market Operations Open market operations refer to the borrowing and repayment of Government debt to the general public. This is undertaken by the state bank to influence the money supply. The state bank can borrow money from the public by selling them securities, bonds and treasury bills. These bills and bonds last for some period of time and therefore that money is out of the market for that time period. 2. Special Deposits The state bank can reduce the money supply by calling for special deposits. The state bank orders commercial banks to deposit money with it for a certain period of time. Calling in special deposits automatically reduces the amount of money that banks have available to lend to their customers. 3. Funding Funding is the name given to the action of the state bank when it buys liquid assets and sells less liquid assets in order to reduce the money supply. 4. Directives Directives...
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...“The Federal Reserve Bank, which is the central bank of the United States, is a bank regulator and is responsible for monetary policy and defines money according to it liquidity “(Open Stax College). The Federal Reserve Bank (FED) is responsible for regulating currency within the United States economy to prevent inflation, recession, and the level of prices. The FED uses measures to track the money supple within the economy. Two measures the FED uses, to track money supply, are M1 and M2. “M1 money supply includes those monies that are very liquid such as, cash, checkable (demand) deposits, and travels checks “(Open Stax College). The M1 measures monies the majority of individuals and business use daily to conduct business or purchases. “The...
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...create money. 1. Banks have excess reserves 2. Banks lend excess reserves 3. The quantity of money increases. 4. New money is used to make payments. 5. Some of the new money remains on deposit. 6. Some of the new money is a currency drain 7. Desired reserves increase because deposits have increased 8. Excess reserves decrease. (b) What factors constrain the ability of banks to create money? There are 3 factors constrain the ability of banks to create money: 1. The monetary base 2. Desired reserves 3. Desired currency holding Question 2 Provide short answers to the following: (a) Explain how the money market determines the nominal interest rate. The nominal interest rate on other assets minus the nominal interest rate on money is the opportunity cost of holding money. (b) Discuss in detail how an open market purchase of securities by the Reserve Bank impacts the money market in the short run. Starting from a short-run equilibrium, if the Reserve Bank increases the quantity of money, people find themselves holding more money than the quantity demanded. With a surplus of money holding, people enter the loanable funds market and buy bonds. (c) Explain how the money market then moves back to equilibrium in the long run. What has happened to the interest rate and price level in the long run? First, the nominal interest rate falls. The real interest rate falls too, as people try to get rid of their excess money holdings...
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...According to proponents of Gold Dinar particularly Meera and Aziz (2002), termed as Dinarists’, the fiat monetary system is inherently unstable. In providing an empirical perspective on this contention, this paper investigates monetary dynamics of a Muslim economy, Malaysia. To this end, the paper adopts a vector autoregressive (VAR) framework to document dynamic interactions between money supply and various macroeconomic variables including real output, price level, interest rate and stock prices. The results seem to provide some support for the Dinarists’ contention. First, the results portray clearly an important causal role of money supply for other macroeconomic variables. Second, we document some evidence that expansion in money supply is inflationary. Lastly, money supply – interest rate and money supply – stock price interactions are destabilizing. More importantly, expansion in money supply has the potential of breeding asset price bubbles. However, apart from the above findings, we also find that money supply reacts positively to increase in real output. Since the accommodative role of money supply is necessary or a pre-condition for expansion in production, arguments for Gold Dinar need to be qualified. Moreover, the viability of Gold Dinar comes into question when political and international aspects of monetary standards are considered. 1. Introduction The recurring currency and financial problems, with the 1997 Asian and 1998 Russian crises as latest examples, have...
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...Should the Central Bank control the Money Supply or Interest Rate 7 Uses of Monetary Policy 9 Drawbacks of Monetary Policy 11 The Effectiveness of Monetary Policy 12 Monetary Policy of Pakistan 13 What is Monetary Policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. The Need for Monetary Policy The government must regulate the money supply in order to maintain economic stability. If the government doesn’t intervene, the banks can lead to destruction in the economy. During a recession, profit-oriented banks would be prone to reduce the money supply by increasing their excess reserves...
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...Money and Inflation: A review to a Nepalese Context Money and Money Supply Money is the stock of assets that can be readily used to make transactions. Money supply is the quantity of money available in the economy. Money supply is considered as a major contributor to inflation. Monetary policy is the control over the money supply. Monetary policy is conducted by a country’s central bank. In Nepal, Nepal Rastra Bank serves as a central bank. There are different lags on the effect of money supply on inflation. M1 or Narrow Money Supply It is a category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts. M1 is used to quantify the amount of money in circulation. M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency. M1=Currency + demand deposits, travelers’ checks, other checkable deposits M2 or Broad Money Supply It is a category within the money supply that includes M1 in addition to total time-related deposits, savings deposits, and non institutional money market funds. M2 is used when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. In Nepal, Broad money supply, M2 has a lagged and temporary effect on inflation. However, compared to other factors such as India’s inflation and international oil prices, M2 has a minor role in contributing to...
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...Assignment #2: Working with Federal Reserve’s Publications Melis Metin Instructor: Prof. Winston Edmonston-Deigh Money and Banking-ECO320 February 1, 2011 Describe the Federal Reserve’s assessment of the current economic activity and financial markets. According to the staff review of the Federal Reserve, consumer spending increased significantly in 2010. Private investment in the form of business outlays for equipment and software is showing a sustainable growth. Construction activities, on the other hand, in both residential and nonresidential sectors of the construction industry are weak. The Fed’s staff observes that the industrial production increased solidly in the recent months due to the colder weather boosting the activities in the utilities. Even though there is a modest gain in employment, unemployment remained high. The trade deficit narrowed slightly in the last months of 2010 due to the increase in agricultural goods exports. The rise in imports was due to the increases in the value of the petroleum products. In the imports front, the Fed observes that the imports of automotive products, services, and consumer goods declined significantly. The Fed expects that the trade deficit will improve over the coming months. In the financial markets front, the Fed observes that short-term funding markets sustained their stability. As for then capital markets, broad U.S. stock price indexes increased. In fact, bank stock prices increased...
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