Questions tagged [money-supply]

Use for questions primarily related to the stock of money, either narrow money (MB or M0), and broad money (M1, M2, etc). This can also be used in questions related to the creation of money by governments and central banks, including questions related to models with a money market like IS-LM, where the supply is of importance.

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Significance of yield spreads in highly liquid environment?

I've come across this chart from a few months ago and am unable to trace down its origins. But I would like to think I should be able to decipher it even without the authors whispering in my ear. So ...
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2 votes
2 answers
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Money Creation in the Modern Economy

I've been reading through this paper and found it fascinating, but have a few lingering questions which I can't quite reconcile. The paper really stresses the point that banks are not reserve ...
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Loans create deposits, banks "are not reserve constrained"?

It is often said that banks are not "reserve constrained" when it comes to lending, and that loans create deposits (and therefore commercial banks create money). I have some doubts about the ...
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Where the budget of USA comes from?

When we say the budget of the defense department are 600 billions per year, where do the 600 billions comes from, are they just created from nothing by just increasing the money supply or they come ...
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Why Increase in Money Supply Reduces Interest Rate in Money Market?

I understand the fact the Increase in Money Supply reduces the interest rate in Money Market. But these two explanations are confusing me a lot. I'm not able to understand which is correct. Reason 1 ...
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Deriving Vertical LM Curve from Money Demand Curve

The statement "If money demand does not depend on the interest rate, the LM curve is vertical" is correct. Now, If money demand does not depend on the interest rate , then it means, ...
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4 votes
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What is the connection between the money market and loanable funds market?

I am studying economics with Khan Academy and came across these 2 articles on The money market and The loanable funds market. (LF = Loanable funds) Now, clearly these 2 systems must be related, right? ...
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How much money is needed when creating a new hypotethical country?

If a new country is to come to existence as a thought experiment, what determines the amount of money that would be needed to bootstrap economic activities? This question is more of a prodding ...
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Is it accurate to say reverse repo is 'conflicting' with monetary policy?

As seen in the chart, historically, reverse repo levels have been fairly small or at most, a few hundred billion dollars: Now into the USD trillion handle, it's a more prominent fixture of the money ...
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Money-market model: Income rises, bond prices fall. But if income rises, saving increases — in bonds. So why does rising income lower bond prices?

According to the money market model that determines the equilibrium interest rate at which the demand for money in the economy equals the supply of money: when the money demand curve shifts right for ...
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Japan: Will the quantity of money per unit of output and the consumer price index show a huge divergence in the decades after 1980?

Milton Friedman, in one of his talks in 1980, showed a series of examples to illustrate his statement that inflation was a monetary phenomenon. One of the examples he used was Japan. The following ...
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Chain effects when Money Demand is greater than Money Supply

Here is an example graph of Money Market Equilibrium The chain effects when interest rate is 8% are : Excess Demand for Money => So, People would sell Bonds => Bond Prices goes Down => ...
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2 votes
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Is supply-caused inflation different from demand-caused inflation

I've heard numerous times that the current inflation problem is caused by supply-side issues including supply chain disruption, lower productivity from fewer people working, impacts from trade ...
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How can I calculate the real government income from expanding the monetary base?

Some governments can pay for expenditures by increasing the monetary supply. How can I calculate the income as a percentage of GDP for such an increase? I am trying to do that for Argentina.
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Which empirical correlations are known between the velocity of money circulation and economic factors?

Usually the velocity of money is calculated as a ratio of GDP (or similiar) over a monetary aggregate (typically M2). But, it is debatable whether that simple ratio is really measuring the rate at ...
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Can the federal reserve just "add zeros" to a bank's balance?

In The G word season 1, episode 3 the show mentions that when the government wants to stimulate the economy, it issues debt and takes that borrowed money to spend on whatever (bailouts, unemployment, ...
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How the money multiplier changes the M1 and M2

I would like to know if my answer to the question below is correct: Question: How much does M1 and M2 change in the following situations? $500 is transferred from a checking to a savings account. ...
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How would an Income Tax Cut affect Money Supply and/or Money Demand in a Country in a Recession with Falling Price Levels

How would an Income Tax Cut affect Money Supply and/or Money Demand in a Country in a Recession with Falling Price Levels. How would Interest Rates be affected and what affects would the change in ...
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Demand deposits in the US between 2002-2008 - why no growth?

I just happened to stumble upon the following graph of total demand deposits in the US. I was very surprised to see essentially no growth between 2002 and 2008. I had heard that in the same period in ...
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Where is all the cash in an economy where saving is high?

Where is all the cash in an economy where saving is high, today inflation in Argentina hit a monthly rate for march of ~7.6%, what this means for me is that I try to move away from the peso as soon as ...
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Why does a balance of payment deficit lead to an outflow of gold under a pre-WW1 gold standard?

I am trying to understand how gold flows "out" of the country during a BOP deficit and why this results in a contraction of the domestic money supply. I am not sure if the following ...
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Money supply vs inflation - repository of raw data?

I would like to do may own analysis of the relationship between the money supply and inflation. Can anyone suggest a good source for raw data? I would like to have access to data for multiple ...
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Bond market downturn - how does money supply change?

When people are pessimistic with bond-holding due to the bearish bond market, chances are high that they would change the ratio of portfolio (i.e., increase the ratio of money, decrease the ratio of ...
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optimal lending levels

Many ratios are mentioned to allude to what caps the amount of money a bank could lend. But none is really convincing. Usually debt ratio and solvability (Basel) ratio are mentioned. Elsewhere there ...
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How would the economy work in a world with strict money supply and where none shall be created?

My intuition tells me this would absolutely limit growth. Trade and all types of borrowing including personal loans, mortgages, and interest rates on credit cards would be seriously limited. From the ...
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What Happens to Govt Securities on Central Bank's Balance Sheet on Maturity?

To properly clarify the motivation of the doubt think of a hypothetical world when there are no business cycles and Central bank intervenes in the market only to provide enough liquidity to sustain ...
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Is excess liquidity necessarily a leading (not lagging) indicator of market performance?

I'm basically looking at this chart: At first glance, I'm not sure it's clear as to why excess liquidity (money supply growth less GDP growth) is charted a whole 12 months ahead in the series. I ...
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What are the standard models of monetary theory?

I am currently conducting research on a digital economy which has recently faced inflation issues and thus implemented monetary policy to tackle them. My paper seeks to compare how real life digital ...
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2 votes
2 answers
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Why don’t sovereigns like Venezuela just immediately replace the currency in event of a hyperinflation

I am struggling to understand why governments, when faced with hyperinflation, often let it drag out for years rather than bite the bullet and replace the currency. Given that by that point the ...
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Monetary sterilization’s working is wrong?

Say, there is an increase in demand for dollars (as compared to the other currency, say yen), which will put appreciation pressures on dollar. Then to counter this appreciation, we need to buy yen. ...
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30 votes
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If no one knew about inflation, would inflation take place?

I’m not an economist and would like some insight into this thought experiment. If people, the news, social media, etc. suddenly stopped talking about inflation, would inflation still take place? ...
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How is value determined?

If I create a new currency (perhaps a cryptocurrency) and I wanted it to be the only currency usable to purchase an item/service, how would I determine the price of that service? I would think that it ...
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3 votes
4 answers
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Who controls money supply if the fed does not?

This whitepaper states (bold mine): According to the consensus view, the two leading culprits of inflation risk today are the fiscal deficit and the money supply. To illustrate, take this CNBC ...
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How do we know that inflation derives from supply chain issues and not from monetary expansion of Central Banks?

Everybody is talking about the fact that the current inflation derives from problems on supply chain distribution but Fed also printed tons of money. How can they affirm that inflation is from supply ...
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2 votes
2 answers
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How do banks restore capital adequacy ratios and what are the consequences

How do banks restore capital adequacy ratios in the event of a fall in the value of their capital? And in particular do the required actions shrink the money supply? If the actions do indeed shrink ...
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Why does absolute price inflation depend on interest rate while relative price inflation does not?

This is a follow-up of my previous question: How come there is inflation in a model with no money? I have answered my own question with an example. To briefly recap the example, consider a closed ...
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2 votes
2 answers
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How come there is inflation in a model with no money?

I'm watching the video lectures of Financial Theory (ECON 251) by John Geanakoplos, Yale University. In Lesson 5, Chapter 4 at 33:41, Geanakoplos defined inflation as the ratio of prices between two ...
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Is new money created when banks buy Treasury Bonds in primary auction?

From my understanding of the current monetary system when a bank issues a loan it is effectively creating money for the receiver of the loan i.e Mortgage. This increases the M1, M2, M3 numbers of the ...
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If repo period is just one day, how do banks arrange the cash to repurchase the securities from the Central Bank?

The RBI (India's Central Bank) website says that "predominantly, repos are undertaken on an overnight basis, i.e., for one day period." So basically, the Central Bank buys securities from ...
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Is There an rNPV Model Relating Money Supply, Total Wealth and Money Velocity?

It seems sensible that the supply of constant-value units of fiat money should roughly correspond to the total wealth of the jurisdiction's economy, in the same sense that an on-demand gold ...
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Does money hidden in "Moneyland" (offshore etc) get included in money supply and savings ratio statistics?

The recent Pandora Papers fuss has prompted me to ask a question that has been on my mind for a while. Does money hidden in offshore trusts, nominee companies and the various other Moneyland ...
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3 votes
2 answers
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Can the Federal Reserve permanently decrease money supply?

As far as I understand it, the primary way the Federal Reserve decreases the money supply is by selling bonds–the entities buying these bonds give up their cash for them and thus M0 is decreased. ...
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How the Fed and Treasury coordinate on liquidity management

On top of the Fed's USD120bn monthly treasury/MBS purchases, the drawdown in Treasury issuance over the last year has also added over USD1tr to the system. The premise is, faced with drawn-out debt ...
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2 votes
1 answer
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Would printing money be necessary for remedying macroeconomic problems such as underemployment and overindebtedness if trade was balanced?

Printing money is often touted as the solution to the macroeconomic problems faced by developed economies today, namely lacklustre GDP growth, public and private overindebtedness and underemployment. ...
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Any support for the idea that QE is employed to prevent the money supply from contracting

It appears to me that QE has been employed after the collapse of housing bubbles - both in Japan in the early nineties and in many other countries around 2008. During a housing bubble there is a high ...
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How do currency boards maintain a 100% foreign reserve backing in the presence of fractional reserve banking?

Under a currency board system, money in circulation has to be 100% backed by foreign reserves. Suppose the domestic currency (A\$) is 100% backed by a foreign currency (B\$), with a fixed 1:1 ratio. ...
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When was the last time printing money involved actual printing?

A common term used when the money supply is being increased is "printing money". Presumably at some point in the distant past, currency was actually printed to increase the money supply. Of ...
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2 votes
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Why was Friedman so wrong about inflation?

In a famous 1977 lecture, Milton Friedman claims that inflation depends purely on the monetary policy and he proves it with a convincing chart (youtube video here) I have reproduced his chart using ...
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When interest rates are high, where does the money that banks pay to depositors come from?

I know that banks primarily make money from the 'spread', that is, people deposit their money in the bank and the bank pays them back with interest, and the bank lends that money to other people and ...
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At what frequency does monetary inflation compound?

The M1 money supply of the U.S. dollar is released monthly. But how often does the Federal Reserve or treasury add/remove a new dollar or a new penny? By second, minute, daily?
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