Determinants of money supply
- Amount of money printed by the Central Bank (government). If the central bank prints more money, money supply increases, but if the central bank does not print money, money supply remains constant or decreases.
- Balance of payment surplus or deficit. When export earnings exceed import expenditure, money supply increases as a result of excess foreign exchange earnings. But when import expenditure exceeds export earnings, money supply reduces in the economy.
- Level of credit creation by the commercial banks. The more the credit created by commercial banks, the more the money supply. This leads to an increase in money supply through the multiplier process and vice versa.
- Level of foreign capital inflow or outflow. Net capital inflow increases money supply but net foreign capital outflow decreases money supply in the economy.
- Level of economic activity. An increase in the level of economic activity increases money supply and a decrease in the level of economic activity reduce money supply.
- Activities of open market operations. This involves which is buying and selling of government securities. When the central bank buys government securities (Bonds and treasury bills) from the public, money supply increases. But when it sells securities to the public, money supply decreases.
- The level of monetization of the economy. The greater the subsistence sector, the lower the money supply. As the economy becomes highly monetized, the need for money increases hence increased money supply.
- The amount of gold reserves held by the central bank. The higher the gold reserves, the higher the money supply and the lower the gold reserves, the lower the money supply.
- Manipulation of the Bank rate (that is, the rate at which commercial banks borrow from the central bank) when the central Bank. increases the Bank rate, money supply reduces and when the bank rate is reduced, money supply increases
- The level of legal reserve requirements (that is, the amount of bank deposits which the commercial banks have to deposit with the central bank).The higher the legal reserve requirement, the lower the money supply and vice versa
CATEGORIES Economics
TAGS Dr. Bbosa Science
