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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23
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10answers
8k views

Why do banks take deposits if they do not need them to make loans?

I have taken some economics courses in university, where I was introduced to fractional-reserve banking. From my understanding, in fractional-reserve banking, the bank has motivation to encourage ...
17
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3answers
818 views

Destroying the dollar

Let's destroy the USD dollar: I am the government of a small, economically and geopolitically unimportant country that has its own currency and a local central bank. I order the local central bank (at ...
16
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4answers
5k views

Why is fractional reserve banking allowed?

I learned about banks' fractional reserves and that revolted me. How is that not considered to be fraud? The idea doesn't seem too sophisticated, on the contrary, it sounds very simple: the bank ...
16
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5answers
2k views

Implications of abolishing Fractional Reserve Banking on mortgages and interest rates

Suppose for a moment that someone with legislative power decides to abolish Fractional Reserve Banking and passes a law that forces banks to only lend the money they own, that is M0. What would be the ...
14
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5answers
4k views

When a stock market crashes, how does money just disappear?

I looked it up online (here), but I find it hard to believe that money literally "disappears". For example, if I buy 10 stocks of a toaster company for \$100 per share, and then the stock value drops ...
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3answers
13k views

Why is money in circulation a liability of the central bank?

We know that the money today is fiat currency, that it is money because the government says it's so. So when new money is printed or loaned out to the commercial banks by buying treasury bonds, ...
10
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3answers
948 views

What is the calculable effect of counterfeiting on an economy?

I'm curious whether one can numerically calculate the effect that counterfeiting has on an economy. As I understand it, counterfeiting essentially amounts to theft of the wealth of everybody holding ...
9
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4answers
3k views

Is the Federal Reserve issuing money in a fair way?

Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be distributed fairly between all the citizens, and that means giving them all an ...
9
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3answers
656 views

Inflation, cause or result of monetary emission?

The argentine economist Fernanda Vallejos, while trying to protect the government because of the inflation, the following: Inflation is not the result but the cause of monetary emission. As there'...
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8answers
8k views

What would be the effects of an expiration date on currency?

Let's say we introduce a monetary system where each piece of money is printed with an expiration date - a year, perhaps. I'm imagining something rather different from inflation (although I do not ...
8
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2answers
6k views

What is the advantage and disadvantage to have a high value of USD for USA?

What is the advantage and disadvantage to have a high value of USD for USA? China and Japan always want to keep their currency low as oppose to USA.
8
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2answers
841 views

How and when is M0 money created?

The Federal Reserve Coin and Currency Service Website describes their currency order process thus: The 7.2 billion notes included in the FY 2015 order reflect the Board’s estimate of net demand for ...
8
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1answer
247 views

Restricting “money creation” to the central bank [duplicate]

Iceland is considering removing "money creation" from commercial banks. [Despite the date of the article, I don't think this is a joke, as it has been picked up in other places since without anyone ...
8
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3answers
378 views

What determines the exchange rate of two fiat currencies if the supply of each is known?

In this blog post, economist Steve Landsburg posed a question about the value of Bitcoin which he didn't know the answer to. Imagine a future in which Bitcoins (or some other non-governmental ...
8
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3answers
2k views

What prevents a bank from simply going into their computer system and adding some zeros to their bank account? [duplicate]

This question has been bothering me for a long time and I’m hoping that someone here can help to answer it. I will use Greece as an example, but my question could really be applied to any country or ...
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5answers
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How is the interest on fractional reserve money creation paid?

In fractional reserve banking commercial banks create money when they make loans. When these loans are paid back the account is zeroed, the created money disappears, but the bank is still entitled ...
7
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4answers
616 views

How is money created on net?

I have the impression that everyone has more net money than in the past. By net money I means cash + money lent to others - money borrowed from others. If this is true, where does the extra net money ...
7
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6answers
680 views

How can the stock market keep growing indefinitely?

It sounds like a dumb question, but there is only so much money in the world. Assets can grow, but money can only be printed. So if there is 400 trillion dollars worth of money in the world, and the ...
7
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4answers
267 views

Why does the inflation not follow the money supply?

To my understanding classical economic theory tells us that inflation occurs when the money supply is increased faster than the economic growth. Lately there has been a sharp rise in the rate of money ...
7
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1answer
664 views

Implications of declining money velocity

In the United States, the velocity of both the M1 and M2 money supplies has been declining for over a decade. The decline in the velocity of M1 could be explained by the shift away from cash to cards ...
6
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3answers
250 views

Fractional reserve banking and the value of someone else's currency

Suppose there are two countries: $A$ and $B$. $A$ is a large, stable, democratic country with its own currency, the dollar. $B$ does not have its own currency. All prices and financial transactions in ...
6
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1answer
129 views

Why are banks allowed to resell mortgages?

It just seems like a way to get around money creation limits imposed by liquidity requirements. For example if a bank creates new money by extending new morgages then securitizes them and resells them,...
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5answers
9k views

How does the money supply behave when bank loans are repaid?

In a fractional reserve system when banks lend out money, that money is created out of thin air by a accounting journal entry, and the money supply goes up by the amount of the loan & when the ...
6
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2answers
194 views

How might the Swiss currency floor be unwound?

The Swiss National Bank has been enforcing a currency floor since 2011, not allowing the EUR/CHF rate to drop below 1.20 by buying unlimited amounts of foreign currency as needed with newly created ...
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2answers
5k views

Why is the money supply perfectly inelastic?

From my notes: We analyze the determination of the interest rate using a supply/demand model relating the interest rate (price of money) to the quantity of money. Since we assume: 1) no excess ...
5
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6answers
2k views

Does the money's “Store of value” function actually exists?

I'm aware of the following four functions of money: Medium of exchange. Measure of value (in dollars, pounds, etc.) Standard for exchanging goods (guaranteed by the Fed) A Store of value (as an asset)...
5
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1answer
92 views

What impact did monetary policy actions taken during the Great Recession (2007-09) have on U.S. economic performance?

What impact did monetary policy actions taken during the Great Recession (2007-09) have on U.S. economic performance? Quantitative easing and unconventional policy actions such as asset purchases and ...
5
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2answers
208 views

Unlimited supply of national currency?

I was reading this article about Denmark central bank defending its currency peg: http://www.bloomberg.com/news/2015-01-22/denmark-cuts-key-deposit-rate-to-minus-0-35-to-drive-down-krone.html In it ...
5
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1answer
8k views

Are prepaid cards, and gift cards considered a form of money?

Are the followings considered a form of money prepaid (debit) cards gift cards (both bank-issued such as American Express gift cards, and store-issued such as Walmart gift cards) ? Are their ...
5
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1answer
81 views

Intuition behind Real Money Demand and Real Money Supply

Standard undergraduate textbooks begin with an exposition of the money market with the following equilibrium condititon: $$\frac{M^{s}}{P}=L\left(R,Y\right) $$ In the above, the LHS is what is ...
4
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3answers
523 views

Why doesn't the government create money, spend it for free without interest, and recollect it with taxes?

I was thinking of a better monetary system, and here is what I came up with it. I'd like to know if this would work, as I see if offers many advantages over our debt-based monetary system today. A ...
4
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2answers
823 views

How is money destroyed when banks issue debt?

Bank of England (2014): Money can also be destroyed through the issuance of long-term debt and equity instruments by banks. How is money destroyed when banks issue debt? Say Bank X issues a £100 10-...
4
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4answers
2k views

Gold coins as currency?

My question is about gold standard. But not the version I always see mentioned (trading bills for gold at a set price). I mean having gold coins in circulation. For example, new currency consists ...
4
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4answers
479 views

Why does an economic slowdown lead to deflation?

Usually economists say that in recession there is deflation, so increasing the money supply does not lead to a high level of inflation. According to the Quantity theory of money, the price level is ...
4
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3answers
630 views

Is a shrinking money supply environment painful for an economy?

During the great depression the money supply in the US fell by about a third. It is my suspicion that any economy with a falling money supply will generally be doing badly but of course I could be ...
4
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4answers
1k views

How does the economy “detect” if money is removed from circulation?

It is well known that there is a strong connection between introducing more money into an economy and inflation, as well as removing money and deflation. However, how does the economy as a whole "...
4
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1answer
287 views

What if only the government could create money? [duplicate]

If I understand correctly, under the dominant system of fractional reserve banking, many (all?) private banks can create money by lending. See, for example, Implications of abolishing Fractional ...
4
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1answer
145 views

How can non-US banks issue USD loans?

I understand, commercial banks are entitled by the Central Bank to "create new money" when they issue a loan and correspondingly "destroy the money" when the loan is paid back (...
4
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1answer
141 views

Could money be tied to a basic good like the gold standard?

I don't have a formal education in economics but I had an idea for creating a better and fairer currency. So the gold standard ties gold to the dollar. Gold is usually used in luxury items like ...
4
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2answers
4k views

What effect would raising reserve requirements while printing money have?

It is generally accepted, that printing money will be inflationary, as it increases the money supply without a corresponding real growth of the economy. At the same time, if the central bank ...
4
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1answer
94 views

When and to what extent should the money supply of a pegged currency be included in the “parent” currency?

For example, the Manx pound is in a de facto currency union with GBP. The Isle of Man Bank chooses to back IMP one-to-one with Bank of England notes, but is not legally required to do so. At one-to-...
4
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0answers
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How exactly do Participatory Notes induce volatility into the economy?

I was reading up on participatory notes. Wikipedia defines these as "instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian ...
3
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3answers
3k views

Why are there (still) coins?

I find coins extremely inconvenient to carry and count. I feel I'm not the only one to find them annoying and inconvenient. What are some economic reasons why all cash money isn't paper and coins ...
3
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2answers
393 views

Why has M1 grown a lot faster than M3 after the financial crisis?

While the fed has printed a lot of money the last decade and the M1 money quantity growth rate has gone up significantly (red), the M3 growth rate (blue) is almost exactly the same as before the ...
3
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3answers
282 views

By what steps and contracts does new money enter the economic system?

Like many noneconomists who read about economic history and finance, I always remain somewhat baffled by the opaque generation of currency under the federal reserve system. My understanding is that ...
3
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2answers
2k views

What is “inter-temporal smoothing”?

In a recent article about the OECD latest report it reads as follows: Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending ...
3
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1answer
139 views

Is The Money Masters (1996) correct in its main thesis?

The Money Masters is a 1996 documentary film that discusses the concepts of money, debt, taxes, and describes their development from biblical times onward. Its main points were summarized by a ...
3
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2answers
141 views

Can banks 'create' money on their own or do they need help from other banks?

My current understanding of the banking money multiplication process goes as follows: Alice comes along and deposits 100 cash into Bank A. Bank A gains 100 in vault cash (reserves) as an asset and 100 ...
3
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3answers
103 views

Creation of Money - Hypothetical Situation

Imagine you sell me some consulting services. I don't have any cash, so I give you a $100 IOU instead. You now have a $100 Note Receivable on your Balance Sheet. ...
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2answers
3k views

Why is M0 higher than M1?

In my understanding, M2 includes M1 and M1 include M0. However, I checked the money supply here and used the "Compare" function to compare the money supply of m0 with money supply of m1, and found ...

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