The total stock of money circulating in an economy is the money supply.
Definition: The total stock of money circulating
in an economy is the money supply. The circulating money involves the currency,
printed notes, money in the deposit accounts and in the form of other liquid
assets.
Description: Valuation and analysis of the money supply help the
economist and policy makers to frame the policy or to alter the existing policy
of increasing or reducing the supply of money. The valuation is important as it
ultimately affects the business cycle and thereby affects the economy.
Periodically, every country's central bank publishes the money supply data
based on the monetary aggregates set by them. In India, the Reserve Bank of
India follows M0, M1, M2, M3 and M4 monetary aggregates.
Control of money supply
1.Changes
in the reserve requirement ratio:
reserve
requirement is a central bank regulation that sets the minimum reserves every
commercial bank needs to hold. Rather than imposing a defined volume of money
to be held by the commercial bank, many governments and central banks prefer to
define a reserve requirement to be adhered by the commercial banks. Through
adjustments in the reserves requirement ratio, the central banks would be
enabled to alter the commercial banks’ liquidity situation and hence credit
supply in the market
2.
Open market transactions:
Open
market transactions could be defined as the utilization of primary issues of
securities via auctions of central bank or government deposits with the
objectives of central bank to affect monetary situations in the markets.
3.
Adjustments of discount rate in short term loans:
The official discount rate is the rate
at which the Central Bank lends to commercial banks.
4.
Interest rate:
The interest rate in a market will
significantly influence the supply of the money in the market.