Determinants of Money Supply!
Measures of Money Supply!
Measure of money must note in the following two things-
First- The supply of money refers to its stock at any point of
Determinants of Money Supply!
The main determinant of money supply are-
- The Required Reserve Ratio (CRR, SLR)
- The Level of Bank Reserves (AD Ratio)
- Public’s Desire to Hold Currency and Deposits
The Required Reserve Ratio:
The required reserve ratio (the minimum cash reserve ratio or the minimum statutory liquidity ratio) is an important determinant of the money supply. 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. Every commercial bank is required to keep a certain percentage of these liabilities (CRR) in the form of deposits with the central bank of the country. The SLR is called secondary reserve ratio in other countries while the required reserve ratio is referred to as the primary ratio. The raising of the SLR has the effect of reducing the money supply with commercial banks for lending purposes, and the lowering of the SLR tends to increase the money supply with banks for advances.
The Level of Bank Reserves:
The level of bank reserves is another determinant of the money supply. By this, every commercial bank must maintain AD (Advance deposit) ratio as per guidelines by central bank. The higher AD ratio effect of reducing the money supply with commercial banks for lending purposes, and the lowering of the AD ratio tends to increase the money supply with banks for advances.
Public’s Desire to Hold Currency and Deposits:
People’s desire to hold currency (or cash) relative to deposit in commercial banks also determines the money supply. If people are in the habit of keeping less in cash and more in deposits with the commercial banks, the money supply will be large.