Bsp Money Supply Policy

Supply of Money There ar several definitions of the supply of money. M1 is narrowest and most usually used. It includes all currency (notes and coins) in circulation, all checkable deposits held at banks (bank money), and all travelers checks. A somewhat broader measure of the supply of money is M2, which includes all of M1 plus savings and magazine deposits held at banks. An even broader measure of the money supply is M3, which includes all of M2 plus large denomination, long-term time depositsfor example, certificates of deposit (CDs) in amounts over $100,000.Most discussions of the money supply, however, are in terms of the M1 definition of the money supply. Banking business. In order to understand the factors that determine the supply of money, one must first understand the role of the banking sphere in the money-creation process. Banks perform two crucial functions. First, they receive capital from depositors and, in return, provide these depositors with a checkable source of currency or with interest payments.Second, they use the funds that they receive from depositors to make loans to borrowers that is, they serve as intermediaries in the borrowing and lending process. When banks receive deposits, they do not keep all of these deposits on hand because they issue that depositors will not demand all of these deposits at once. Instead, banks keep only a fraction of the deposits that they receive. The deposits that banks keep on hand are known as the banks reserves. When depositors withdraw deposits, they are paid out of the banks reserves.The reserve requirement is the fraction of deposits set aside for withdrawal purposes. The reserve requirement is determined by the nations banking authority, a government agency known as the central bank. Deposits that banks are not required to set aside as reserves can be modify to borrowers, in the form of loans. Banks earn profits by borrowing funds from depositors at zero or low rates of interest and using these funds to make loans at higher rates of interest.