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theory of money supply

The monetary authority does so by fixing the total supply of H. Given H, the public determines how much of H it would like to hold in the form of currency and how much to leave for banks to serve as their reserves.

Therefore, c is a behavioural ratio.

The stability analysis offers an opportunity for studying the disequilibrium behaviour of the system. They did not have enough bankable earning assets to buy. According to the quantity theory of money, if the amount of money in an economy doubles,

For this, let us ask what will happen if, other things being the same, the public comes to hold DD, amount of demand deposits which are less than the equilibrium amount DDBefore- answering this question, it needs to be pointed out that the excess supply of R is not the same thing as excess reserves (ER), because desired excess reserves at each level of DD are already included m the RExcess reserves, whether desired or undesired, do not earn banks any interest income.

At the time, Keynes advocated for a government response to the global depression that would involve the government increasing their spending and lowering their taxes in order to stimulate demand and pull the global economy out of the depression.

Because of the stable conditions in the market for government securities (and the borrowing facilities against government securities as collateral extended by the RBI to banks), banks are not even encouraged to hold on to their surplus cash on grounds of speculation. One of the primary research areas for this branch of economics is the … However, the long-term effects of monetary policy are not as predictable, so many monetarists believe that the money supply should be kept within an acceptable bandwidth so that levels of inflation can be controlled. For reasons that will become clear in the sequel, it is also called the ‘money-multiplier theory of money supply’.

All this goes to support our theoretical assumption about the capacity of banks to move into earning assets when they have undesired excess reserves and keep actual excess reserves equal to desired excess reserves. While this theory was originally formulated by Polish mathematician Nicolaus Copernicus in 1517, it was popularized later by economists Milton Friedman and Anna Schwartz after the publication of their book, "A Monetary History of the United States, 1867-1960," in 1963. Our objective here is not to go into a detailed discussion of the banks’ demand for excess reserves (ERMoreover, this ratio between liabilities and deposits has remained stable over the past 20 years. In such a world, during depressions the demand for bank loans and advances could decline sharply and banks could stay loaded with undesired excess reserves. The quantity theory of money is a theory that variations in price relate to variations in the money supply.

This means that even if the demand for bank loans and advances slackens significantly, banks are not constrained to stay in undesired cash reserves; they can move into government securities as earning assets.

The money supply is all the currency and other liquid instruments in a country's economy on the date measured. Now we can confidently answer that they will invest and/or lend such ER. net loss of cash due to cross-clearing of cheques among banks).

But prepara­tory to this discussion and also to throw further light on what has preceded, we undertake the stability analysis of the equilibrium of the Markets for H and R. This will also bring out clearly one crucial assumption of the H theory. However, it was revealed over time that strict adherence to a controlled money supply did not provide a solution for economic slowdowns. Investments are made in marketable securities, whether government or private.

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