0
$\begingroup$

In my intro macroeconomics course, my professor tried to emphasize that the money supply changes ONLY by increasing or decreasing lending activity. However, I feel like he was trying to focus on lending because most people have the misconception that the Federal Reserve just "prints money" to increase the money supply. However, is it true that although the MAJORITY of the money supply increases with more lending, that in some cases the Federal Reserve does "add zeros" to their spreadsheets to influence the money supply? For example, if they wanted to increase the money supply they could "print money" and use those funds to buy bonds from banks which in turn would then lend out that money and increase the money supply.

$\endgroup$
0
$\begingroup$

Of course, the central bank could print more currency to increase the money supply by a process known as seigniorage. But how will it get that newly created money into circulation?

Here is what it does - It lends that newly created money to commercial banks which further process it to the borrowers. Thus, it all come down to the lending activity.

Everything else being constant, the increase in money supply lowers the market interest rate further pushing the lending activity.

PS : This is how the Reserve Bank of India works. RBI in Indian economy is the banking regulator and hence could control the money supply. I don't know if it works exactly the same way for Federal Reserve.

$\endgroup$
0
$\begingroup$

Depends on what you mean by money supply: M0, M1 etc (see here for example). If M0, then printing money is literally issuing new coins and bills.

The Fed can certainly "add zeroes" and use the extra money to buy other assets. The frequency of this is an empirical question.

Ask your professor what she/he meant.

$\endgroup$
  • $\begingroup$ I think he just wanted to emphasize that the majority of new money is created through lending (money multiplier) and to deemphasize what most people commonly refer to when they think of increasing the money supply (printing dollars). $\endgroup$ – user27343 Nov 12 '18 at 2:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.