Readers Question: how will central bank may increase the supply of money in economy?
The money supply is the total amount of money available in the economy at a particular point in time. A narrow definition of money involves notes and coins. A broader definition includes cash plus bank and building society deposits.
Policies to Increase Money Supply
- Print Money. Central Banks can decide to print more notes and coins. This increases the money stock in a direct way.
- Reserve Ratio. Central Banks can make commercial banks keep a certain reserve ratio e.g. 5% of their deposits must be kept in cash. Higher reserves diminishes the creation of money in an economy. If Central Banks reduce minimum reserve ratios, banks can lend out more and this leads to an increase in the money supply through the money multiplier
- Purchase of Government Gilts. The Central Bank can purchase long dated government bonds from Central Banks. This increases the cash reserves of banks and lowers interest rates on gilts. In theory with greater cash reserves, banks will lend more. Also lower interest rates should encourage lending.
- Quantitative Easing. This occurs when the Central Bank electronically creates money in order to finance the purchase of bonds and securities. This should have a bigger effect on increasing the money supply than just buying bonds with existing money. Quantitative easing is often pursued during unorthodox times such as a liquidity trap and a prospect of deflation.
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i am studied MBA in Tamil nadu in India i want to become a richest man in the world how its possible
There is a more robust policy of Actually combining two or more of the above policies especially in LDcs where the economies are more cash based.
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