Supply of Money

The level of economic activities

depends on the level of money
supply.

If money supply exceeds the

demand for money it is increases
the rate of expenditure which in
turn increases the price level and
vice versa.
It is a commonaly accepted
principle of economics that the
forces of demand & supply
determine the value of a
commodity. Money can also be
considered as a commodity and
its value depends on it’s demand
and supply.
 Supply of Money
Supply of money refers to the
stock of money held by the
public and institution in
spendable form only. It is the
aggregate stock of domestic
money held by
individuals,business firms ,
 industrial undertakings, state &
local bodies.
• It also include demand
deposits held by public in
banks. Demand deposits are
considered as money held by
public itself because we can
withdraw at any time.
Time
 deposit held by
public with commercial
banks are not included in
money supply because
legally they are not payable
on demand. They serve as
store of value at the most.
 • They do not function as
means of payment

• They at the most can be

regarded as quasi money or
near money
.
The availability of such assets
of cource effect the behavior
of money spending therefore
can be considered as part of
aggregate money supply
Money Supply = Currency held
by public + demand deposit

M1 = Currency Notes and coins

with public(excluding cash in
hand of all the banks,
Demand deposit exclude inter
bank deposit

Demand deposit held with the

RBI exclude IMF, PF, guarantee
funds & ad hoc liabilities.

M2 = M1 +Saving deposit with

the post office saving bank
M3 = M1 + Time deposit of
commercial banks &
cooperatives Bank excluding
inter bank deposit

It includes net bank credit to

government + bank
credit to commercial sector +
net foreign exchange exchange
assets + Govt. currency
liabilities to public

M4 = M3 +Total deposit with

post office organization
excluding NSC
Effects Of Inflation
Effects on Distribution :
A modest increase in price
level is good. National Income
will increase, the value of
money will fall

People with income flexible –

like
Profit, Trade income,
Speculation will gain for
inflation, Salaried income,
wage earner will be loser
Entrepreneurs – gain ,
Investors – gain, Debtors-
gain,
Creditors- loose , Fixed Income
group – loose, Wage earners –
Loose

Inflation is Tax
Effect on Production:

A mild doze has healthy impact

on production. But a high
inflation rate has negative
impact.
1. It discourage saving
1. The rate of interest lags
behind rise in price
2.Excessive inflation creates
uncertainly in the economy
3. It encourages hoarding
tendencies, people prefer
hoarding than production
1. Inflation develops a seller’s
market, hence, consumers
are exploited.
2.Balance of Payment
becomes unfavorable.
Imports are more than
exports. Capital flight due to
uncertainty.
Inflation & Rate of Interest
r = i-π

where, ‘r’ is real Rate of Interest

‘i’ is nominal Rate of
interest
‘π’ is inflation rate
 Fisher Effect

Nominal interest rate is

composed of Real interest rate &
Inflation rate.
Nominal Interest rate can
change if Real rate change or
Inflation change or both
change. It is known as Fisher
effect (given by,Irving Fisher).

•According to the quantity

theory of money, 1% increase in
money causes 1% inflation rate.
According to Fisher, 1% increase
in Inflation is causes 1% increase
in nominal rate