Page 149 - DECO402_Macro Economics

Macroeconomic Theory

Notes Self Assessment
State whether the following statements are True or False:
7. Notes are actually Promissory paper.
8. The people in all the countries don’t deposit their money in banks.
9. Currently, the unchangeable method to release the notes is circulated in all the countries of
the world.
10. Banks give the loan on the basis of money deposited to them.

16.4 Factors influencing Supply of Money: A Theoretical Prescription

According to Prof. Chandler the supply of money in an economy depends on the following
elements—

(1) Size of the Monetary Base

It is called as High Power Money or Outside Money or Reserve Money. High Power Money or Outside
Money is said to that money which Reserve bank or Government releases and which Public and Banks
keep in themselves. In other words,
H = R + C
(Here, H: High Power Money, R: Total Reserves of Banks, C: Currency in circulation)
In other words,

High Power Money = Total Reserves of banks + Currency of Public (Notes and Coins)
The difference in money and high power money is that money includes demand deposits besides
the currency while high power money includes cash reserves of banks besides the currency. The
supply of money then increases when there is an increment in high power money. The size of supply
of money depends upon money multiplier. The money multiplier is the ratio of high power money
and the sum of total of currency, required reserves of the banks and other deposits of the banks with
the Central bank.

(2) Proportion of Cash and Demand Deposits

This thing also affects the supply of money what is the ratio of cash and demand deposits. People will
want to keep however larger proportion of money in deposit form, as larger the power of banks on
the basis of those deposits, to create the credit. The quantity of credit creation depends on the size of
credit multiplier. The size of credit multiplier is affected by Cash Reserve Ratio – CRR. The proportion
of total deposits banks have to keep themselves as cash is called as Cash Reserve Ratio – CRR. The
Cash Reserve Ratio will be as smaller, the power of credit creation of banks will be as larger and
supply of money will also be increased as much. Therefore, if people would like to keep more part of
total money as deposits then supply of money will increase.

(3) Velocity of Circulation
To estimate the supply of money, economists have two approaches:
(i) The Supply of Money at a Point of Time: The approach of economists of Cambridge
University, as- Marshall, Pigou, Robertson and Keynes was that at a point of time the supply
of money can be estimated by the sum of currency of people and demand deposit.

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