Page 150 - DECO402_Macro Economics

Unit-16 Money Supply: Definition and Importance of Money

(ii) The Supply of Money in a Period of Time: In the exponents of Quantity Theory of Money, Notes
Irving Fisher was interested in knowing that in how much amount the money is supplied
in a special time period. In a special time period, the unit of money can be used many times.
So that unit of money can work in more than one unit. Assume that a unit of money is used
average 7 times in a year in India. This means that single unit of money has worked of 7
units. It would be said Transaction Velocity of Money i.e., V is 7. Therefore this is the purport
from the Transaction Velocity of Money that “Velocity of money is number of times a unit
of money changes hands in the course of a year.”
Therefore, the Supply of Money in a definite time period can be estimated from multiplying the
quantity of Money with circulation velocity. In other words,

Supply of Money = MV

16.5 Summary

y 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.

16.6 Keywords

y Money Supply – Supply of Money.
y Creation of Credit -- Secondary deposit.
y Outside Money – Creation of outside money.

16.7 Review Questions

1. Express the meaning and definition of money supply.
2. Which are the two main components of Money Supply?
3. Determine Monetary Aggregates and Money Supply measures in India.
4. Describe the factors influencing supply of Money.

Answers: Self Assessment
1. paper money 2. money 3. (a) 4. (a) 5. (b)
6. (b) 7. True 8. False 9. True 10. True

16.8 Further Readings

Books 1. Necessity of Microeconomics— H. S. Nath, Cyber Tech Publication, 2012.
2. Macroeconomics— S. K. Chakravarti, Himalaya Publishing House, 2010.
3. Macroeconomics: Economic Growth, Fluctuations and Policy— Robert E.
Hall and David H. Paipel, Vaina Books, 2010.
4. Macroeconomics: Theory and Policy— H. L. Ahuja, S. Chand Publisher, 2010.

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