Page 145 - DECO402_Macro Economics

Macroeconomic Theory

Notes deposits which depositor can get on demanding or can take from the bank by cheque. But economists
are not unanimous on the general definition of money. There are different approaches about money.
Many economists consider the currency and money deposit as two components of money supply
while other economists consider the term deposits as the third component of money supply. In actual,
if only current currency and demand deposits will be included in money supply then we’ll bound
money till the media of exchange only. The base of store of value is also an important work of money.
On interpreting this work, currency, demand deposit, term deposits and other financial instruments
should be included which work as the base of store of value.
y According to Milton Friedman : Money supply should also include saving and term deposits
besides currency in circulation and demand deposits.
y As per Edward Shapiro : Supply of money is dollar amount of all those things which are
generally acceptable by the public in payment of goods, services and other valuable assets
and for discharge of debts.
y According to J.G. Gurley and E.S. Shaw, Money should include all those things which are
it’s close substitutes.

 Why include term deposits in the supply of money?
These deposits are for definite time period. The interest rate on it is constant according to time.
These can’t be converted into cash by the cheque, because of which these deposits are different from
money deposits. So they can’t be called cash-in-hand. Question arises that if these deposits are not
liquid as currency than why are these included in the supply of money? Undoubtedly, the receipt
of fixed deposit is not used in exchange medium for current and future payments; then also the
economists as Milton Friedman are in the favour of including these receipts in the supply of money.
His advice is that term (fixed) deposit can be converted into demand deposit on high discount rate.
The conversion of term deposit into demand deposit takes the equal time as the payment of high
discount rate to the bank. Therefore, fixed deposits should also be considered as a part of supply
of money similar to demand deposits.

Notes The conversion of term deposit into demand deposit takes the equal time as the
payment of high discount rate to the bank.

Self Assessment
Fill in the blanks:
1. Currency is the addition of current coins and …………. in economy.
2. The base of store of value is also an important work of ……………. .

16.2 Two main Components of Money Supply—Currency and Demand
Deposits

The two main components of Money Supply are (1) Currency and (2) Bank Deposits. The detailed
explanation is as following:

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