The Money Supply

In a perfect market economy the price level is determined by the interaction between the amount of money available for use, which is the supply of money, and the amount that people and firms want, which is the demand for money.

The factors influencing the supply of money depend on whether the money is privately produced (for example, by firms that produce gold) or is supplied by the government. If money is privately produced, the supply depends on the profitability of producing it. If money is supplied by the government, the amount supplied depends on the reasons that the government has for supplying it. These reasons are, in practice, closely related to government policies that are designed to affect the outcome of the economy.

Following the monetarist argument that the average level of prices and wages is determined by the amount of money in circulation, and its velocity of circulation, many central banks now set money supply targets. By increasing or decreasing the money supply, the central bank indirectly influences interest rates, demand, output, growth, unemployment and prices. The central bank can reduce the reserves available to commercial banks by changing the reserve requirements. This reduces the amount of money that banks can create and makes money tight or scarce. Alternatively, the central bank can engage in what are called open market operations, which involve selling short-term government bonds (such as three-month Treasury bills) to the commercial banks, or buying them back.

In the UK, the government uses several definitions of the supply of money that is available to meet the demand for making transactions and for precautionary and speculative purposes. These include:

M0, the wide monetary base, or high-powered money; all notes and coins in circulation and in banks, plus the banks′ balances in the central bank.

M1 measures the domestic currency in circulation plus the bank deposits or current accounts of private households and firms against which cheques may be written. In the US, the amount of notes and coins in circulation plus demand deposits – checking accounts from which money can be withdrawn on demand. Also referred to as narrow money.

M2, broad money; a US measure including notes and coins plus time deposits (interest-bearing savings accounts).

M3 is M1 plus time deposits (or savings accounts) in the banking system.

The widest measure M4 includesM3 plus all the money deposited in building societies in the UK and savings and loan associations and money market funds in the US.

Thus there is a spectrum of money, ranging from cash and bankers^ balances (MO) to wide definitions such as M4. In modern financial systems, one form of deposits can quickly and cheaply be converted into another. One sequence of this is that attempts by the government to regulate one particular measure of the money supply quickly lead to people switching to forms of deposit that remain unregulated.

Date: 2015-10-19; view: 2022; Нарушение авторских прав