On the contrary, if people do not have banking habits and prefers to keep their money holdings in cash, credit creation by banks will be less and the money supply will be at a low level. 4. High Powered Money and the Money Multiplier: The current practice is to explain the determinants of the money supply in terms of the monetary base or high-powered money.

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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.But the total money supply is usually measured not in terms of M but as M 1, M 2, and M 3.The Determinants of the Money Supply The money multiplier, reserve and currency ratios, and borrowed reserves.Palley Dept. of Economics New School for Social Research New York, NY 10003.The depositors have to undergo a cumbersome process of cash withdrawals in post offices.Before explaining these two components of money supply two things must be noted with regard to the money supply in the economy.

Research in Business and Economics Journal The relative importance, page 2 INTRODUCTION The supply of money is widely heralded as a key determinant of the levels of.This classification was introduced by the Reserve Bank of India (RBI) in April 1977.The central bank requires all commercial banks to hold reserves equal to a fixed percentage of both time and demand deposits.Bonds of companies also possess less liquidity because they can be converted into cash after the expiry of the bond maturity period.Money Supply Measures(Monetary and Liquidity Aggregates) M0 M1 etc issued by RBI.The use of high-powered money consists of the demand of commercial banks for the legal limit or required reserves with the central bank and excess reserves, and the demand of the public for currency.High-powered money is the sum of commercial bank reserves and currency (notes and coins) held by the public.

The relation between the money supply and high-powered money is illustrated in Figure 1.Given Cr, RRr, Err and the high-powered money Hs, the equilibrium money supply is OM.The inclusion of post office savings bank deposits in M 1 is meant to measure the increase in total money supply which affects the economy.In fact M 3 is an empirical measure of money supply in India, as is the practice in developed countries.

Answer to What is the basic determinant of (a) the strength of the transactions demand for money (the location of the transactions demand for money curve) and.Growth of money supply is an important factor not only for Money Supply: Importance, Concepts, Determinants and Determinants.

What is the basic determinant of (a ) the transactions

The second cost is in terms of the bank rate which is a sort of penalty to be paid to the central bank for failure to maintain the legal required reserve ratio by the commercial bank.M 3: The third measure of money supply in India is M 3 which consists of M 1 plus time deposits with commercial and cooperative banks, excluding interbank time deposits.In other words, the money supply is determined by high powered money (H) and the money multiplier (m).Commercial bank reserves consist of reserves on deposits with the central bank and currency in their tills or vaults.

The higher the value of m 2 multiplier, the lower will be rate of Cr, Rr and Er.

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The third definition is the broadest and is associated with Gurley and Shaw.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.M 3 includes M 1 plus time deposits (also known as savings deposits in developed countries) with commercial banks and cooperative banks.

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It is M 3 which is taken into account in formulating macroeconomic objectives of the economy every year.The discount rate policy affects the money supply by influencing the cost and supply of bank credit to commercial banks.

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Although not a determinant of individual firm supply, the number of sellers in a market is clearly an important factor in calculating market supply.If a nation uses commodity money, the money supply is determined by the cost of producing the metal and the rate of production.Learn more about determinants of supply in the Boundless open textbook.Keywords: Money Supply, Determinants, Money Multiplier, Proximate, Policy Oriented.The lower these ratios are, the larger the money multiplier is.If these two criteria are applied, none of the three definitions is wholly satisfactory.