ECONOMICS BY PRATHAM SINGH MONEY & BANKING (GE) (CBCS) (SCAN QR CODE FOR.YOUTUBE LECTURES OF THIS UNIT) @ Concept - 1 @ Concept of Money & Its Functions (Not So important For Exam) Economists define money as anything that is generally accepted by the society for payment for goods or services or in the repayment of debts. Coins and Notes clearly fits this definition and is one type of money. When most people talk about money, they are talking about eurreney (paper money and coins). If, for example, someone comes up to you and says, Your money or your life, you should quickly hand over all your currency rather than ask, What exactly do you mean by money ? To define money only as currency (coins & Notes) is much too narrow for economists. Because cheques are also accepted as payment for purchases, itis also considered as money. As you can see, there is no single, precise definition of money for economists. Money is Different from Wealth & Income Wealth = The total collection of property which has store value is called wealth. Wealth includes not only money but also other assets such as bonds, stock, art, land, furniture, cars, and houses ete Income = Income is a flow of earings per unit of time. Like your income per day, per week, per month, per annum etc. Money, by contrast, is a stock: it is a certain amount at a given point in time. If someone tells you that he has an income of 21000, you cannot tell whether he eared a lot or alittle without knowing whether this 1000 is earned per year, per month, or even per day. But if someone tells you that she has 21000 in her pocket, you know exactly how much this is. G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Functions of Money (1) Primary Functions of Money a) Medium of Exchange : Medium of exchange is an important functions of money. Money as medium of exchange means that it can be used to make payments for all transactions of good and services because it has the quality of general acceptability. Now a person can buy and sell goods at any time and tare place with the help of money. Money has separated the function of sale and purchase. This functions has removed the major difficulty of lack of double coincidence of want Now, exchange of goods become convenient and simple. Money saves a lot of time and labour. Money works as medinm of exchange because it is generally acceptable and aprroved & authorised by Government b) Measure of Value (Unit of Value/Account) : Money as a measures of value means the value of each goods and services are expressed in a common unit. For example: In India the common unit for measure of value is INR (Indian Rupee), In America the common unit for measure is USD (US Dollar). Im barter system, the value of one goods was expressed in terms of other good. But ‘Now, this function of money has removed this difficulty. This function provide maintenance of business accounts, which would be otherwise impossible in barter exchange. When all values are expressed in terms of money, it becomes easier for anyone to compare the values of any two goods. Money works as a unit of account and it express the value of each good in monetary unit (2) Secondary Functions of Money ©) Store of value : It is a subsidiary or Secondary fiction of Money. Money as a store of value means that money is an asset and can be stored for use in future. This function is also known as ‘Asset function of Money’. In barter system it was very difficult to store the value in terms of goods because goods are perishable in nature and needed much space. But now money has removed this difficulty. Money as s store of value has the following benefits: a. Money is available in fractional denomination, ranging Rs. 1 to Rs. 2000 b. Value of money remains relatively stable to other goods c. Itis the most liquid assets. G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH d) Standard of Deffered payments: It is a subsidiary function of money. Deferred payments refer to those payments which are made in the future, Money has made deferred payments much easier than before. In the absence of money, deferred payments were difficult. It was difficult to arrange the goods of exactly the same quality at the time of repayment. It was impossible to determine the amount of principle and interest in terms of goods. But now, money has removed this difficulty, due to general acceptability of money, future payments are expressed in terms of money. Money has simplified the borrowing and lending activities. It has led to the creation of financial institutions. Money is unit in term of which debts and future transactions can be settled. Thus loans are made and future contract are settled in term of money e) Transfer of Value: Money also serves as a convenient mode of transfer of value. Goods and property ete. can be transfer from one place to other with the help of money. Due to this function, ‘Money has promoted both consumption expenditure and investment expenditure across all parts of the world. Concept of Global economy has come into existence. Markets have expanded across international boarders. © Concept - 2@ Money : Properties, Evolution & Types (Not So important For Exam) Properties of Money 1. Durable : Money Should be durable such that it does not depreciate quickly when not in use. Gold and silver meet this criterion. Eggs would therefore be poor medium of exchange. Divisible : Money should be made of a commodity which is divisible into smaller unit. If Money is not divisible then you can not do small exchanges Portable : Money Should be portable as it is easier to carry. Digital money is the most portable as it can be sent electronically. Recognizable Value : Money should have easy recognizable value. Modern currency has different colour, different size, different ink ete. All of these make it easier to recognize its value. 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Volution of Money Commodity Money Metallic Money Paper Money Bank or Credit Money Plastic Money E~— Money Types of Money Legal Tender Vs Optional Money money. Legal tender money is of two kinds: a) Limited Legal Tender : It refers to money which can be accepted upto certain limit. Beyond this limit, a person may refuse to accept the payment and no legal action can be taken against him. In India, coins are limited legal tender money b) Unlimited Legal Tender : It refers to money which can be accepted upto any Limit. Legal action can be taken against a person who refuses to accept this money. In India, paper notes are unlimited legal tender. 2) Non ~ Legal Tender Money or optional money (also Called fiduciary Money ): It refers to that form of money, which is generally accepted, but legally, person is not bound to accept it. For example, cheques, banks drafts, bills of exchange, ete. do not have legal pressure and their acceptance is totally optional. Commodity Money Vs Representative Money 1) Commodity Money (Full Bodied Money): Commodity Money is the money which is made up of a certain Metal like Gold & Silver. and its face value is equal to its intrinsic value, is known as Commodity Money (full bodied money) where, Money Value = Commodity Value. 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH For example, during the British period, one rupee coin was made of silver and its valne as money was same as its value as a commodity. 2) Representative Money (Representative Full Bodied Money): Representative money refers to the paper money (or certificate) whose intrinsic value is much lower than its face value, ic. Money Value > Commodity Value. Itis accepted as money as it can be conveniently used for carrying out transactions. Such a type of paper money is 100% backed by metallic reserve of gold or silver and is redeemable at the option of the holder. For example, in case of convertible paper receipts, a person can exchange the amount stipulated on the paper receipt for equal value of gold. Representative Money 1) Convertible Paper Money Convertible Paper Money is the money that can be converted into Gold and Silver on demand. Convertible Paper Money is normally backed by gold or silver reserves. Therefore, it can be converted into gold or silver 2) Inconvertible Paper Money Inconyertible Paper Money is the money that cannot be converted into Gold and Silver on demand. It is also known as fiat money, this money is sanctioned on the command of the government Inconvertible Paper Money is not backed by gold or silver reserves. Therefore, it cannot be converted into gold or silver. For Example, Currency Notes in India of @1, 22, %5, U0, 220, %50 ete. are Inconvertible Paper Money. It may be noted that ‘promises to pay’ written on the currency notes are not ‘promises to pay’ something else Current Usage: Nowadays, Convertible Paper Money is not in use. Nowadays, Inconvertible Paper Money is in use in almost all countries. G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH @ Concept - 3 @ olution of Banking , 100% Reserve Banking & Fractional Reserve Banking (Not So important For Exam) Evolution of Banking + In starting, People used Gold and silver for the transactions of Goods and Services. To save these Gold and Silver from Theft, Fire etc. Goldsmith started the Banking System. The evolution of the banking system started with the practice of goldsmiths providing the safekeeping depository services in the 17 century in Europe Goldsmiths at that time helped wealthy people in storing precious metals like gold and silver in their vault in return for a storage fee. For acknowledging the deposit, goldsmiths issued notes (Bank Note) or receipts and handover to the depositor They noticed that depositors were using these notes essentially as a medium of exchange. Also, from experience, they analyzed that the possibility of redemption of receipts simultaneously by all depositors is minimal. This situation gave goldsmiths the idea of lending out & goldsmith started giving Loans 100% Reserve Banking Bank holds reserves equal to the total value of outstanding bank notes and demand deposits fully It covers the hypothetical situation in which all deposits and bank notes are withdrawn on same day. Bank charges money to store deposits and to trade specie (Gold and Silver) for bank notes to earn profit. Fr: 1 Reserve ing Banks realized that most of the money in their vaults was never withdrawn. It sat idle while demand deposits and banks notes circulated as money. They realized that they could loan out some of their reserves and eam additional profit on loans. This led to fractional reserve banking, in which bank reserve equal only a fraction of outstanding demand deposits and bank notes. 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH @ Concept - 4 @ Money Multiplier (important For Exam) The money multiplier approach focuses on the relationship between money stock and reserve money. Money Multiplier shows the ratio of Money Supply (Here we are talking about Narrow Money Supply) to Monetary Base. And In other words, it shows the multiple of monetary base which causes increase in money supply. Higher the Money Multiplier, higher the money supply and vice — versa Here are two important tenms in Money Multiplier are : Money Supply & High powered Money Money Supply (M) : In the narrowly defined terms, ‘M’ can be defined as the sum of currency (C) and demand deposits of banks held by the public (D). Since other deposits of RBI included in this, measure of “M’ are a very small proportion (less than one percent) of the total money supply of ‘M? and thus, can be ignored. Money Supply (M)= C + D High Powered Money (H) : High powered money is the money produced by the RBI as well as the Government of India (small coins including one rupee notes), and held by the public and banks. High powered money comprises of (i) Currency held by Public (C), (ii) Cash Reserves of Banks (R) and (iii) Other Deposits of the RBI. Again, other deposits of the RBI can be excluded for the purpose of theoretical analysis, as they constitute only about 1% of total ‘H’. High powered money also called, Reserve Money, Outside Money or Monetary Base High Powered Money (H)=C +R Derivation of Money Multiplier (Narrow oO mney, Bveply ms ce ae Ase ' . # Money 5 = Gunung -+ Deposit cn 2 igh foword monen w= i 4p Reoenve. a 3 Pratham singh — The Economics Addict (@)) prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH me ms me = c+o C+ARTER Airiding by 'D’ to Nw oak D> ee + 4 ER & (Money Multiplier) Note : ¥ che LL caneny to deposit Ratio} D a eee £8 [Require Revenue to Deposit Ratio} eds EB [exes Room ts Defosit Ratio} wa) [ER =e] 8 Pratham singh - The Economics Addict (@) Prathamsingho99 (@ 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Example : Calculate Money Supply. If, Money Monetary Base = 2400 Cd = 0.25 OR 25% rr = 0.20 OR 20% ed = 0.05 OR 5% oastt 0.254+0.2040.05 ion of Complete Deposit Multiplier MB = C+ RATER Me= ctx B+ orx D+ exp meat try tet)xD mBx_) =D charted Compete Deposit Mustiplicry Calculation of Change in Deposit : cl ter ratham Singh - The Economics Addict ()) prathamsingh999_ (7011004544, 9643399334ECONOMICS BY PRATHAM SINGH le Deposit Mul Vs Complete Deposit Multiplier Deposit. = i i a verter “Ue [Aimple Depesit-mussintier | Deposit Mustiplicr | rnete Deposit musty | X44 Complete Oagorit: mute {Simple deposit: mussielier Note : Simple Deposit Multiplier is always more than Complete Deposit Multiplier +o. core posi Gmplete Garrenty Mustiplicx Calculation of change in Complete Currency Multiplier : d beu= < x ome ct{ivxvted —— ratham Singh - The Economics Addict (@) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Calculation of Money Supply mMs=c+D ms ett | + [ear 8] me eer xmB Formula For Numerical © money mustiplier m= Ata +4 Al m= pen suet cdtrrsted monetary Bare ® Money Aurtly / money BRK M.S = cd+4 ete oy me a Aint PA] MS=mx mB ® tda se C= cAxD ® rr Bh RR = xD @ ed=€& fa) ER=e&xD © p= A xmg ie) cAhtax ted ; - Deposit = D @ bere iptes mutiplier G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH = = =e (ore cd tr¥ ted, Ceaeruntay ® Goren «ait muHflier, cd tated Avs —4 cd+ay ea AmB @ oc= _ed ——__,*omB cd4yrtedk’ cat] @® Am= 4¢+aD pe] B= sya oS ® Myon) = c+ o L) mpfmorekay Base or = © eC Wigh fowercel Money, SOTERTES ® Ofen Market Purchase, Numericals Questions (For Solutions Scan QR Code) QI. What are the changes in Deposit, Currency holdings and the money supply for an open Market sale of & 2,00,0002 The required reserve ratio is 10%, the desired excess reserve ratio is 10% and the desired currency to deposit ratio is 20%. Q2. Derive Deposit Multiplier and Complete Money Multiplier. What are the changes in deposits, currency holdings and money stock, if the RBI purchases 21,00,000 worth of Government securities from open market when : Required Reserve Ratio = 10% Desired Excess Reserve ratio = 5% Desired Currency to deposit ratio = 25% © Pratham singh - The Economics Addict (@) Prathamsinghoo9 (W 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Q3. Consider a situation in which the required reserve ratio is 15% and each bank individually decides to hold 5% of every deposit against emergency withdrawals, in addition to legally mandated reserves. There is no holding of cash. If there is an open market purchase of %5,00,000. What would be the effect on total deposits of banking system ? Q4. Suppose the central bank decides to make Rs. 100,000 open market sale. If high powered money (H) = Rs. 500,000/-, required reserve ratio (rr) = 0.20, excess reserve ratio (ed) = 0.05 and currency deposit ratio (cd) = 0.25, what will be the total currency holdings of the public? @ Concept - 5 @ Money Suppl uation & Its Determinants (Important For Exam Money Supply equation indicates how much money is created in the economy fora given monetary base. It is expressed as follows Major Determinants of Money Supply are : a) Required Reserve Ratio (cx) (Depends upon Central Bank) ‘b) Currency to deposit ratio (Cd) (Depends upon Public) ©) Desired Excess Reserve Ratio (ed) (Depends upon Commercial Bank) ) Monetary Base (Depends upon Central Bank) Any Change in any of these determinants will change the amount of Money Central Bank Determinants of Monev Supply Central Bank influences money Supply in Two Ways: (@) Monetary base : The RBI can increase or decrease the monetary base by open market purchase or sale. An increase in the Monetary Base leads to increase in the money supply and any decrease in the monetary base leads to decrease in the money supply. (Monetary Base has direct relation with Money Supply) Required Reserve ratio : RBI can change the money Supply and Money Multiplier by changing in the Required Reserve Ratio. An increase in Required Reserve ratio decreases the money supply by reducing money multiplier. (Required Reserve ratio has indirect relation with Money Supply) 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Commercial Bank Determinants of Money Supply Banking system helps to determine the money supply by changing in the excess reserve ratio Higher excess reserve reduces the amount of loan, thus reduces money supply. On the other hand, lower excess reserve ratio, increases the money supply in the economy. In other words, Excess Reserve Ratio has indirect relation with money supply. Factors that influence the Excess Reserve ratio : a) Market Interest Rate on Loan : Interest rates on loans affect desired ratio of excess reserves, Increases the in the market rate of interest lead to fall in the excess reserve ratio, hence it lead to rise in money supply. And Similarly, Fall in the market rate of interest lead to rise in the excess reserves ratio, hence it lead to fall in money supply. Risk of Deposit Withdrawals : Banks hold excess reserves mostly to help them deal with umexpected withdrawals. Natural calamities such as earthquakes or hurricane will generally lead banks in those areas to hold additional excess reserves in the anticipation of people withdrawing funds to repair homes etc. Higher the risk of withdrawals, greater the excess reserve ratio. (lead to fall in Money Supply). Interest rate on Borrowed Reserves : When the interest rate paid on borrowed reserves increases, the option of borrowing becomes less attractive. So, the excess reserve ratio increases. This tends to reduce the complete money multiplier and thus the money supply. Public Determinants of Money Supply Public helps to determine the money supply with currency held by them (currency to deposit ratio) Ifpeople want to hold more cash, then desized to currency ratio will increase. This will reduce the money multiplier, and lead to reduction in money supply. Factors will lead to change in the currency to desired ratio are : a) Interest on checkable deposits : When the interest rate on chequable deposit rises, the attractiveness of holding currency declines. Which lead to fall in currency to deposit ratio. ‘As you know, there is negative relation between Currency to deposit ratio and money multiplier. Thus, Fall in currency to deposit ratio lead to rise in money multiplier and money supply Fees on checkable deposits : Money holders looking to choose between currency and chequable deposit will also be influenced by the fees charged on accounts. For example, monthly maintenance charges, ATM withdrawals charges ete. When the fees/charges increases, the attractiveness of holding money increases. It results to rise in Cd, which ultimately causes to fall in money multiplier and money Supply. 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH c) Income : The income of the money holders has also some influence on the currency to deposit ratio. Currency to deposit ratio has negative relation with income. Those, who have high income tend to be more rely on the financial system than currency. They like to hold their money in bank, not with themselves. As a result, currency to deposit ratio falls. On the other hand, Those who have low income are more likely to use currency in their transactions. ‘As a result, currency to deposit ratio rises, Probability of bank Failure : When the probability of a bank failure rises, money holders tend to reduces deposits in favour of currency. They withdraw all the money from bank, and hold their money in form of currency. It rises currency to deposit ratio, which ultimately reduces the money supply. Illegal Activity : Any increase in the transaction (illegal transaction) that take place in the underground economy will tend to increase in the currency to deposit ratio and thus decrease the money supply. @ Concept - 6 @ Money Su Curve (Important For Exam) Money supply curve shows the amount of money suppliers are willing and able to supply at various interest rates in the economy. We know that there are four determinants of money supply that is Moneta, r, ed and cd. But Interest rate has no relation with M.B and 1r because it is determined by Central Bank. Interest rate has impact on ed (excess reserve) and ed (Currency holdings). There are two views of economists on this: a) First View, interest rate has no relation with ed and ed. (Exogenous Money Supply curve) b) Second View, interest rate has relation with ed and ed. (Endogenous Money Supply curve) Exogenous Money Supply Curve When the excess reserve ratio and the currency to deposit ratio are constant, the money supply curve is exogenous and a vertical function of interest rates. In this case Money Multiplier is constant. As a result, the amount of money supplier along the money supply curve does not vary with interest rates. It is vertical as shown in the diagram. It is the simple money multiplier, where we assumed that depositor never hold cash (.e., zero currency to deposit ratio) & banks never hold excess reserves (ie, Zero excess reserve ratio) money Stock, 3 Pratham singh — The Economics Addict (@)) Prathamsingh999 (@ 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH Shift in Money Supply Curve a) Increase in Money Supply (Rightward Shift) : Money Supply will increase or shifts rightward, when there is Rise in Monetary Base and Fall in Currency to deposit ratio, excess reserve ratio and required reserve ratio b) Decrease in Money Supply (Leftward Shift) : Money Supply will decreases or shifts leftward, when there is Fall in Monetary Base and Rise in Currency to deposit ratio, excess reserve ratio and required reserve ratio. Endogenous Money Supply Curve Some economists believe that the excess reserves and 7 currency to deposit ratios are not constant , but vary with economic conditions. For example, as interest rate rises, banks will give more loan to public for earning profit, it will & lead to fall in excess reserve ratio. Similarly, as interest rate z rises, depositors will wish to hold less currency to eam greater income from bank deposits. In these cases, money multiplier is not constant, but an increasing function of interest rates. Money supply curve is an-upward sloping function of interest rates. And curve is called Endogenous Money supply curve. Shift in Money Supply Curve a) Increase in Money Supply (Rightward Shift) : Money Supply will increase or shifts rightward, when there is Rise in Monetary Base and Fall in required reserve ratio. b) Decrease in Money Supply (Leftward Shift) : Money Supply will decreases or shifis leftward, when there is Fall in Monetary Base and Rise in required reserve ratio. Q. Suppose, the central Bank engage in an open market purchase of securities from a securities dealer. Graphically illustrate the impact of this action on the Money Supply curve when (a) the money Supply is exogencous and (b) the Money supply is endogenous. ‘Ans : Regardless of whether the money Supply is endogenous or exogenous, open market purchase raises the monetary base and thus money supply shifis to the right. (Draw Diagrams Yourself) G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH @ Concept - 7 @ Measures of Money Su; Money Su ‘egates) (important For Exam) Firstly in 1961, First Working group on Money supply presented the concept related to Monetary Groups The second working group was formed by RBI in 1977. This Group Presented 4 aggregates for the complete money supply on the basis of Liquidity. These measures are : M1, M2, M3, M4 M1 = Currency with Public + Demand Deposit with Bank + Other Deposits with RBI (M1 is also known as Narrow Money) ‘M2=M1 + Demand Deposit with Post Office. (Also Known as Liquid Money) ‘M3 =M1 + Time Deposit of Bank. (MB is also known as Broad Money) ‘M4 = M3-+ All Deposit with Post Office. (Excluding National Saving Certificate) (MA is also known as Stock of Money and the widest measure of Money Supply) Note : Other Deposit of RBI Includes : a) Deposit of Public Financial Institutions b) Money From international Institutions ©) Money from foreign Government Other Deposit of RBI does not includes a) Deposit of Commercial Banks b) Deposit of Own Govermments The New Monetary Aggregates RBI third working group for measuring money supply in India was formed in 1998. The working group recommended that the proposed monetary aggregates should be applied from fiscal year 1999- 2000. 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH However, the old monetary aggregated would need to be continued for sometime for the purpose ‘of comparability. There are two basic changes in the New monetary aggregate a) Since the post office is not a part of the banking sector, postal deposit are not treated as money, as it was treated in M2 and M4. ‘b) The new series clearly distinguish between monetary aggregated and Liquidity aggregates. ‘New Monetary Aggregates = NM0, NM1, NM2, NM3 Liquidity Aggregates = L1, L2, L3 New Monetary Aggregates Weekly Compilation MO = Monetary Base / High powered Money = Currency in Circulation + Banker’s Deposit with RBI + Other Deposit with RBI Fortnightly Compilation NM1 = Currency with Public + Demand Deposit with Bank + Other Deposit with RBI M2 =NM1 + Time liabilities portion of Saving deposit with bank + Certificate of Deposit + Term Deposit of Maturity within a year (Excluding FCNR Bank Deposit) M3 = NM2 + Time deposit with maturity over one year (Exchiding FCNR Bank Deposit) + Call/Term Borrowing by Banking System. Liquidity Aggregates ‘The working group under the chairmanship of Dr. Y. V Reddy (1998), then Deputy Governor of RBI had suggested four New Monetary Measures, NM0, NM1, NM2, NM3 & Three Liquidity Aggregates. Monthly Compilation L1 =NM3 + Postal Deposit (excluding National Saving Certificate) L2=L1 + Term Money Borrowings, Certificate of Deposit and Term Deposit of Financial Institutions like IDBI, HDFC, SIDBI, NABARD ete. Quarterly Compilation L3 =L2 + Public Deposit with NBFI (Non Banking Financial Institutions) Like Muthoot Fincorp Ltd., Bajaj Finance Limited ete. G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH @ Concept - 8 @ Broad Money Multiplier (important For Exam) c= Currency to Demand Deposit Ratio t= Time Deposit to Demand Deposit Ratio 1 =ratio of reserve to demand and time deposit together H= High Powered Money Der: of Broad Money Multiplier P= el wm = C+D0+TO C+R m= C+DDtTD cy 7 (oD+ 1) C4 We te f+ ro a a Lt: JO Dp * +B Calculation of Money Supply (M3) m= Ms ae Mg= c+ast C+ (14t) My=m.H 8 Pratham singh - The Economics Addict (@) Prathamsingho99 (@ 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH A Fairly Model of Money Supply l+c+t = recent = aI (H° + DF - ER) ¢ = Currency to Demand Deposit Ratio t= Time Deposit to Demand Deposit Ratio r= ratio of reserve to demand and time deposit together H® = Non Borrowed Reserve Money DF = Discretionary Finance OR Discount Loan ER = Excess Reserve When a bank decides to hold excess reserves, it does not lend them out. Hence, no deposits are created. If the central bank injects reserves into the banking system, which are simply held as excess reserves for whatever reason, there will be no effect on deposits or on the money supply. In other words, excess reserves in the banking system could be regarded as an idle component of reserves that are not being used to support any deposits. This implies that such reserves should be subtracted from the reserve money so as to focus on the amount that is actually supporting money supply. In the opposite direction, when bank borrow from central bank, their capacity of deposit creation is increased. The amount of discretionary finance to the banks must accordingly be added to the stock of reserve money. urces of changes in Money Supply Relation with Money | Response of Money ‘Supply Supply Rise in (C/DD Ratio) Negative Contraction Rise in t (T/DD Ratio) Positive Expansion Rise in r (Reserve Ratio) Negative Contraction Rise in H® (Non Borrowed Reserve) Positive Expansion Rise in DF (Discretionary Finance) Positive Expansion Rise in ER (Excess Reserve) Negative Contraction 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH November 2016 Q1._Consider a situation in which the required reserve ratio is 15% and each bank individually decides to hold 5% of every deposit against emergency withdrawals, in addition to legally mandated reserves. There is no holding of cash. If there is an open market purchase of 75,00,000. What would be the effect on total deposits of banking system ? (5 Marks) Ans : Already Done in Videos Q2. Derive the money multiplier when money is defined as broad money. Discuss the sources of changes in Money Multiplier. (10 Marks) Ans : Topic~ 8 of Notes December 2017 Q1. What are the changes in Deposit, Currency holdings and the money supply for an open Market sale of f 1,00,000? The required reserve ratio is 10%, the desired excess reserve ratio is 5% and the desired currency to deposit ratio is 25%. (9 Marks) Ans : Already Done in Videos Q2. Graphically illustrate the impact of open market purchase of securities by central bank on Money Supply. When (a) the money Supply is exogencous and (b) the Money supply is endogenous. (6 Marks) Ans : Topic 6 of Notes December 2018 QI. What is meant by Endogenous and Exogenous Money Supply curves? How do various components of money supply multiplier affect these curves? Explain.(8 Marks) Ans : Topic ~ 6 of Notes (Concept of Endogenous and Exogenous Money Supply curves & Shift in Endogenous and Exogenous Money Supply curves) Q2. Suppose the central bank decides to make Rs. 100,000 open market sale. If high powered money (H) = Rs. 500,000/-, required reserve ratio (rr) = 0.20, excess reserve ratio (ed) = 0.05 and currency deposit ratio (cd) = 0.25, what will be the total currency holdings of the public? (7 Marks) Ans : Already Done in Videos 3 Pratham singh - The Economics Addict (@) Prathamsingho99 (® 7011004544, 9643399334ECONOMICS BY PRATHAM SINGH December 2019 No Exam in December 2019 Due to COVID-19 December 2020 (OBE) QI. Suppose the central bank decides to make Rs. 100,000 open market sale. If high powered money (H) = Rs. 500,000/-, required reserve ratio (rx) = 0.20, excess reserve ratio (ed) = 0.05 and currency deposit ratio (cd) = 0.25, what will be the total currency holdings of the pu (7 Marks) Ans : Already Done in Videos Q2. What factors might cause a bank to change its desired excess reserve ratio?. (8 Marks) Ans : Topic ~ 5 of Notes (Commercial Bank Determinants of Money Supply) December 20214 (OBE) QI. Explain why the money supply might change due to change in the behavior of commercial banks and the central bank? (7 Marks) Ans : : Topic — § of Notes (Commercial Bank Determinants of Money Supply & Central Banks determinants of Money Supply) Q2. What are liquidity aggregates? Mention these aggregates for India as given by the Third Working Group? (8 Marks) Ans : Topic— 7 (Liquidity Aggregates) Connect with me at Whatsapp “9643399334” G3 Pratham singh - The Economics Addict (@)) Prathamsingh999 (® 7011004544, 9643399334