Enter the change in reserves and the money multiplier into the calculator to determine the money supply.

Money Supply Formula

The following formula is used to calculate a money supply. Make money online in nigeria earn money online.

The Nominal GDP of the country per latest publicly available data is $1.394 billion. The finance minister was asked to calculate the money velocity of the country as the average growth has not crossed 2% for some of the last periods. The minister was advised to increase the supply of money in the economy if the money velocity is below 50. Interest rate adjusts to bring money supply and demand into balance. Determination of interest rate in the money market Money Market Equilibrium yThe interest rate is determined by the supply of and demand for money. YAt any given moment in time, the quantity of real money supplied is a fixed amount since the Fed can influence the supply. Repeat the previous two steps for the year from which prices you're using as a reference for the money's real value. With this example, using 2008 prices and quantities: (90 × $12) + (65 × $18) = $2,250. Divide this dollar amount by the amount you arrived at from 2008 prices and quantities: $2,250 ÷ $3,100 = 0.7258.

MS = R * MM

Where MS is the money supply
R is the change in reserves
MM is the money multiplier

Money Supply Definition

Money supply is defined as the product of the change in value of the reserves and the money multiplier.

Money Supply Example

How to calculate the money supply?

First, determine the change in reserves.
Calculate the total change in reserves of a country.
Next, determine the money multiplier.
Calculate the money multiplier to be applied to the reserves.
Calculate the the money supply.
Using the formula, calculate the money supply.

FAQ

What is a money supply?

A money supply is a measure of all of the liquid instruments and currency of a countries economy.

What is included in money supply?

Usually, cash and cash equivalents such as deposits that can be used as cash are considered in the money supply.

Read this article to learn about the money supply: it’s definitions, determinants and high-powered money and money multiplier!

The supply of money is a stock at a particular point of time, though it conveys the idea of a flow over time. The term ‘the supply of money’ is synonymous with such terms as ‘money stock’, ‘stock of money’, ‘money supply’ and ‘quantity of money’.

The supply of money at any moment is the total amount of money in the economy. There are three alternative views regarding the definition or measures of money supply. The most common view is associated with the traditional and Keynesian thinking which stresses the medium of exchange function of money.

ADVERTISEMENTS:

According to this view, money supply is defined as currency with the public and demand deposits with commercial banks. Demand deposits are sayings and current accounts of depositors in a commercial bank. They are the liquid form of money because depositors can draw cheques for any amount lying in their accounts and the bank has to make immediate payment on demand. Demand deposits with commercial banks plus currency with the public are together denoted as M₁, the money supply. This is regarded as a narrower definition of the money supply.

The second definition is broader and is associated with the modern quantity theorists headed by Friedman. Professor Friedman defines the money supply at any moment of time as “literally the number of dollars people are carrying around in their pockets, the number of dollars they have to their credit at banks or dollars they have to their credit at banks in the form of demand deposits, and also commercial bank time deposits.”

Time deposits are fixed deposits of customers in a commercial bank. Such deposits earn a fixed rate of interest varying with the time period for which the amount is deposited. Money can be withdrawn before the expiry of that period by paying a penal rate of interest to the bank. So time deposits possess liquidity and are included in the money supply by Friedman. Thus this definition includes M₁ plus time deposits of commercial banks in the supply of money. This wider definition is characterised as M₂ in America and M₃ in Britain and India. It stresses the store of value function of money or what Friedman says, ‘a temporary abode of purchasing power’.

The third definition is the broadest and is associated with Gurley and Shaw. They include in the supply of money, M₂ plus deposits of savings banks, building societies, loan associations, and deposits of other credit and financial institutions.

The choice between these alternative definitions of the money supply depends on two considerations: One “a particular choice of definition may facilitate or blur the analysis of the various motives for holding cash and two from the point of view of monetary policy an appropriate definition should include the area over which the monetary authorities can have direct influence. If these two criteria are applied, none of the three definitions is wholly satisfactory.

The first definition of money supply may be analytically better because M₁ is a sure medium of exchange. But M₁ is an inferior store of value because it earns no rate of interest, as is earned by time deposits. Further, the central bank can have control over a narrower area if only demand deposits are included in the money supply.

The second definition that includes time deposits (M₂) in the supply of money is less satisfactory analytically because “in a highly developed financial structure, it is important to consider separately the motives for holding means of payment and time deposits.” Unlike demand deposits, time deposits are not a perfect liquid form of money. This is because the amount lying in them can be withdrawn immediately by cheques.

Normally, it cannot be withdrawn before the due date of expiry of deposit. In case a depositor wants his money earlier, he has to give a notice to the bank which allows the withdrawal after charging a penal interest rate from the depositor. Thus time deposits lack perfect liquidity and cannot be included in the money supply. But this definition is more appropriate from the point of view of monetary policy because the central bank can exercise control over a wider area that includes both demand and time deposits held by commercial banks.

ADVERTISEMENTS:

The third definition of money supply that includes M, plus deposits of non-bank financial institutions is unsatisfactory on both the criteria. Firstly, they do not serve the medium of exchange function of money. Secondly, they almost remain outside the area of control of the central bank. The only advantage they possess is that they are highly liquid store of value. Despite this merit, deposits of non-bank financial institutions are not included in the definition of money supply.

Determinants of Money Supply:

There are two theories of the determination of the money supply. According to the first view, the money supply is determined exogenously by the central bank. The second view holds that the money supply is determined endogenously by changes in the economic activity which affects people’s desire to hold currency relative to deposits, the rate of interest, etc.

Thus the determinants of money supply are both exogenous and endogenous which can be described broadly as: the minimum cash reserve ratio, the level of bank reserves, and the desire of the people to hold currency relative to deposits. The last two determinants together are called the monetary base or the high powered money.

1. The Required Reserve Ratio:

The required reserve ratio (or the minimum cash reserve ratio or the reserve deposit ratio) is an important determinant of the money supply. An increase in the required reserve ratio reduces the supply of money with commercial banks and a decrease in required reserve ratio increases the money supply.

How to earn money online for free philippines. This course is completely risk-free despite the tendency of such a venture dismissal initially treated as a scam aiming at the illusionary gamble involvement. They can earn funds by using extensive writing for money opportunities.

The RR₁ is the ratio of cash to current and time deposit liabilities which is determined by law. Every commercial bank is required to keep a certain percent

Calculate Real Money Supply