This document discusses the supply of money. It defines money supply as consisting of currency in circulation plus deposits with commercial banks. It identifies several approaches to defining money supply, including traditional, monetarist, and other modern views. The document also discusses the determinants and components of money supply, including the monetary base, money multiplier, and velocity of money. It provides equations to demonstrate how the money supply is calculated based on these factors.
This document discusses the supply of money. It defines money supply as consisting of currency in circulation plus deposits with commercial banks. It identifies several approaches to defining money supply, including traditional, monetarist, and other modern views. The document also discusses the determinants and components of money supply, including the monetary base, money multiplier, and velocity of money. It provides equations to demonstrate how the money supply is calculated based on these factors.
This document discusses the supply of money. It defines money supply as consisting of currency in circulation plus deposits with commercial banks. It identifies several approaches to defining money supply, including traditional, monetarist, and other modern views. The document also discusses the determinants and components of money supply, including the monetary base, money multiplier, and velocity of money. It provides equations to demonstrate how the money supply is calculated based on these factors.
This document discusses the supply of money. It defines money supply as consisting of currency in circulation plus deposits with commercial banks. It identifies several approaches to defining money supply, including traditional, monetarist, and other modern views. The document also discusses the determinants and components of money supply, including the monetary base, money multiplier, and velocity of money. It provides equations to demonstrate how the money supply is calculated based on these factors.
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Money and Financial Markets
PART-I (Money)
Chapter 3
Supply of Money
Bibhuti Ranjan Mishra VNIT, Nagpur 1-
1. Introduction
Money is used as a means of payments and accepted for the settlement
of debts. Supply of money – stock of money held by the public in spendable forms. Public – Individuals and business firms excluding banks. Stock as well as a flow
Bibhuti Ranjan Mishra VNIT, Nagpur
2. Constituents of Money Supply
a. Traditional View:
Currency money + Bank money
b. Modern View
Currency money + Bank money + Time deposits + Financial Assets
Currency Money: Legal tender money called as High Powered Money 1 rupee coin issued by MoF. Rest coins issued and managed by RBI. RBI Act, 1934- 40% of the total asset should consist of gold coins, bullions and foreign securities with the value of Rs. 40 crores. RBI Act, 1956,- minimum reserve system replaces proportional reserve system. [foreign securities – Rs. 400 cr., Gold coins and bullions – Rs. 115 cr. RBI Act, 1957 – Reserve should be at least worth Rs. 200 cr., and gold value – Rs. 115 cr.
Bibhuti Ranjan Mishra VNIT, Nagpur
Determinants of currency money
1. Volume of Transactions 2. Nature of Trade 3. Method of Payment 4. The Price level 5. Banking Habits 6. Distribution of Income 7. Other factors Bank Money Total money supply: primary HPM and secondary or bank money Currency (2/3rd) and Demand deposits (1/3rd)
Bibhuti Ranjan Mishra VNIT, Nagpur
3. Approaches to the definition of money supply Traditional Approach Money Supply= currency with public + demand deposits with the commercial banks.
Monetarist Approach Money Supply= currency with public + demand deposits + time deposits.
Gurley and Shaw Approach:-
Money Supply = currency with public + demand deposits + time deposits + liabilities of non banking intermediaries (saving band deposits, shares, bonds etc.)
Redcliffe Committee Approach:-
Money supply= cash + all bank deposits + deposits with other institutions + near money assets.
Inaccurate measure as degree of liquidity varies across institutions.
Bibhuti Ranjan Mishra VNIT, Nagpur
4. Velocity of Money
Transaction velocity of money

Income velocity of money
 Velocity of money (Income < transaction)
Theory of Velocity of money
 or  Assuming,  But,  One time change in P does not affect V. Real income will effect V positively. Interest rate and V are directly related. Expected inflation influences interest positively, thereby affecting V positively .
Bibhuti Ranjan Mishra VNIT, Nagpur
Factors influencing velocity of money
Payment system Money supply Regularity of income Value of money Propensity to consume Credit facilities Distribution of income Volume of trade Liquidity preference Frequency of transactions Size of population Business conditions Means of transport and Business Integration communication
Bibhuti Ranjan Mishra VNIT, Nagpur
5. Theory of money supply
Money Supply Model
 Definition and Ratios    Or   Or    Or 
Bibhuti Ranjan Mishra VNIT, Nagpur
Money multiplier
Substitute (6) into (5) and use the result in (3)
Substitute (4) and (7) into (8),
Equation (9) can be solved for DD to give,
Here,  is known as the deposit multiplier. Now substitute (10) and (4) into (2),
The expression  in equation (11) is known as the money multiplier (m).
Bibhuti Ranjan Mishra VNIT, Nagpur
Money Supply Function
 Where,  is the value of money.   is the rate of interest.   is the real income.   is monetary policy.   is the seasonal factors. 
Bibhuti Ranjan Mishra VNIT, Nagpur
Determinants of Money Supply
1.
1. Monetary Base 2. Money multiplier 3. Reserve ratio 4. Currency Ratio 5. Confidence in Bank money 6. Time-deposit ratio 7. Value of money 8. Real income 9. Interest rate 10. Monetary policy 11. Seasonal Factors
Bibhuti Ranjan Mishra VNIT, Nagpur
6. Money Supply in India
   
High Powered Money
 New Series Since 1997-08, we follow the methodology of Work Group on money Supply: Analytics of methodology and compilation” (June 1998).  differs from old  by a magnitude of consisting of FCNR (B) deposits and RIBs, and banks pension and provident funds.
Significance of Money Supply Measures
As an economic variable, . As a policy controlled variable, . Bibhuti Ranjan Mishra VNIT, Nagpur
