Supply of Money | UGC NET Economics – Notes

Money Supply means the total amount of money and other liquid assets in a country’s economy in circulation. Banking regulators regulate the money supply through policy and regulatory actions in order to maintain economic stability. Money supply data is collected and published because it influences the price level, inflation, the exchange rate, and the business cycle.

What is Supply of Money?

• The total stock of money circulating in an economy is referred to as the supply of money.
• In layman’s terms, it is defined as currency in circulation plus deposits in commercial banks.
• The supply of Money consists of the following:
  • The total currency circulating in the public
  • Non-bank deposits with a commercial bank
• Currency in circulation is the total value of all currency (coins and paper currency) issued by the Reserve Bank of India minus the amount withdrawn by it. It is a significant liability on a central bank’s balance sheet.
• Currency in circulation (currency with the public) includes the following:
  • Currency notes and coins with the public
  • Cash in hands with banks
• Money supply plays a crucial role in the determination of price level and interest rates.
• The growth of the money supply helps in the acceleration of economic development and price stability.
• Credit control policies imposed by a country’s banking system aid in determining the total supply of money.
• The monetary base and the money multiplier ultimately determine the money supply.
• Monetary policy has an effect on the money supply as well.
  • The expansionary policy raises the total supply of money in the economy faster than usual, while contractionary policy raises the total supply of money more slowly than usual.
  • Expansionary policies are used to combat unemployment, whereas contractionary policies are used to slow inflation.