How to increase the money supply. money supply

6. Inflation as a consequence of inflation of the money supply Inflation is not the law of development, but the work of the fools who run the state. L. Erhard Inflation in the traditional economic literature is defined as the overflow of circulation channels with paper money and their depreciation,

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Money supply (Md) is a tool for managing economic processes by the central bank, including the total number of legal means of payment.

How does the money supply move in the economy?

The priority function of the Central Bank is to maintain the solvency of the national currency. Growing/decreasing money supply in the economy is a clear indicator of the quality of the RF monetary policy.

When calculating indicators of the indicator, it is important to take into account the total amount of cash, electronic money supply, which forms the national turnover.

To calculate the total aggregate Md, consider the formulas for its parts:

• MO = funds outside banks ("cash");
• M1 = MO + financial resources of current accounts, credit accounts (individuals/enterprises) + demand capital on Sberbank accounts;
• M2 = M1 + urgent ;
• M3 = M2 + certificates, government bonds;
• M4 = M3 + deposits in credit institutions.

The money supply of the country: features of the calculation for the Russian Federation

A certain number of aggregates with individual structure is applicable to each country.

Thus, M2 may include "peno" transactions for the sale and repurchase of securities. M3 sometimes includes treasury bills and forward currency buyback agreements between central banks.

It is important to consider that the more primary the indicator, the higher its liquidity. The most liquid aggregate is MO, the least liquid is M4, reflecting the private investment sector.

If you are interested in the money supply of the country, take into account the exchange transactions for export transactions and the results of conversion turnover in the calculation.

Are we in danger of inflation in the money supply?

Inflation of the money supply - "bloating" of money and depriving them of security, solvency.

The firm, consistent financial policy of the Russian government protects small businesses and the population from a sharp decline and external supervision of the money supply.

When justifying a strategy for exchange trading, planning tactics for spot transactions, pay special attention to forward transactions, futures, and factoring transactions.

What characterizes the circulation of money supply?

The circulation of the money supply, of course, must be justified:

1. The need of the economy.
2. Control over the issue of credit funds.

It is important to understand that the vector of cash flow can always be adjusted by certain actions of the Central Bank of another country or private trading agencies.

Keeping statistics of domestic money turnover, it is important to realize that banknotes play a role in it, although the current trend in the world economy tends to increase the share of credit funds not only by replacing one type of money with others, but also by crowding out the manufacturing sector by a growing service market.

What influences the money supply?

Factors that determine the amount of money supply and the speed of its circulation:

1. The cyclical nature of the state economy.
2. Direction of price movement.
3. The structure of the country's overall balance sheet.
4. The level of credit development.
5. The value of interest rates.
6. Share of savings.
7. Balanced spending.
8. The level of the shadow market.

The higher the sovereignty of the state, the more elastic and balanced its monetary system. The proportionate size of the velocity of the money supply to its quantity means very high growth rates of the money supply, provoking the activation of inflationary processes and expectations.

What is the structure of the money supply?

The structure of the money supply implies taking into account the "monetary base".

Keep in mind, the monetary base includes the amount of:

• cash circulation, including money from the non-financial sector, cash desks of banks;
• required reserves;
• funds of credit institutions in the Central Bank.

The monetary base serves as a liability of the Central Bank and is characterized by increased activity. However, this indicator is not an indicator of the actual situation, since it is the most subjective of all other aggregates.

What does an increase in the money supply imply?

The increase in the money supply is due to factors:

• militarization of the economy;
• credit expansion;
• foreign exchange inflow.

Draw your own conclusions. The number of specified means of payment put into circulation must be regulated by:

• a certain volume of production of industrial sectors;
• natural change in prices, the elimination of informal monopoly.

It is absolutely unacceptable to cover the budget deficit by issuing funds that, in essence, remain unsecured, contributing to the reduction of the commodity functions of money.

What does a decrease in the money supply lead to?

Reducing the money supply, increasing liabilities is the main instrument for curbing inflation.

1. Raising taxes.
2. An increase in the interest rate of the Central Bank.
3. Reducing municipal spending.
4. The growth of savings.
5. Tightening conditions and methods of lending.

To build an effective policy, it is important to determine:

• the golden mean between the policy of monetization of money and the government withdrawal of part of the money supply;
• allowable level of electronic circulation, taxation.

For the correct formation of financial policy, it is important to remember that the deterioration of the economy necessarily occurs as a result of the uncontrolled overflow of capital into the foreign economy, the intermediary sphere of circulation.

The money supply of the state is the amount of money available for spending by consumers in a particular country. In Russia, the circulation of money is regulated by the Central Bank. An increase in the money supply entails a decrease in interest rates, which, in turn, makes bank loans, and hence more money, more accessible to the population.

The Central Bank increases the money supply by purchasing government securities, injecting more money into the banking system. An increase in the money supply reduces the value of the Russian ruble, but increases the amount of money that banks can lend to the public. When banks have more money to lend, they lower the interest rates at which consumers pay for the loans they receive, and this leads to an increase in consumer spending, because. borrowed money becomes more accessible to them. When a country is experiencing a slowdown in the economy, the government increases the money supply to encourage the population to make more purchases and thereby improve the economic situation.

An increase in the money supply can also have a negative economic effect. It entails a depreciation of the ruble, which makes imported goods more expensive, and domestic goods for sale abroad cheaper. With the close interconnection of different states in the world economy, this phenomenon can spread to other countries and affect their economies. The cost of metal, cars and building materials may increase. As a result, due to the rising cost of materials and construction work, prices for commercial and residential real estate may also increase. But, at the same time, an increase in the money supply contributes to an increased issuance of loans by banks to the population, and, accordingly, the receipt of additional money by citizens is greatly facilitated.

Successful management of the global economy requires an effective monetary policy. An increase in the money supply is one of the many options for regulating the economy available to the government of the country. In addition, the government can change tax rates, customs duties, bank reserve requirements, the key interest rate, etc.

Too much increase in the money supply can lead to inflation, and the value of the ruble will fall against the currencies of other countries. This development of events leads to a reduction in the cost of domestic products for foreign consumers and a rise in prices for their citizens.

For many years, the Central Bank and the Russian government have monitored the volume of the money supply. This indicator has a direct impact on the growth of the economy and the gross domestic product (

To date, the most well-known component of the money supply is cash. This concept combines both coins and banknotes, which together are only a small part of the means of circulation. Currently, their modern expression is represented by checking accounts (demand deposits). They are materially intangible.

The main reasons for keeping money in cash

It is known that there are four of them, in particular:

• absolute liquidity of this type of means of circulation;
• ease of use as means of payment;
• reserve aspect in case of urgent need for financial expenses;
• fear of inefficient investment of cash.

What are monetary aggregates?

In the modern aspect, they consist of two dominant groupings of liquid assets, acting as alternative measures of the entire money supply.

The M1 monetary aggregate is represented by cash and transactional deposits, more precisely, special deposits, the funds on which are available for transfer to third parties as an electronic transfer or payment by check. A significant number of exchange transactions in countries with a developed market economy are carried out mainly through the above aggregate, where money acts as a direct means of circulation.

What is the second grouping of liquid assets that measure the money supply?

The M2 money supply covers a wider spectrum. In addition to its main function, money in this case also acts as a means of accumulation. The monetary aggregate under consideration includes:

• deposit accounts;
• term deposits;
• demand deposits, etc.

That is, these are assets that have a fixed nominal value and can be transformed into a means of payment. At the same time, they are deprived of the possibility of transfer by other persons and do not give their owner the right to pay by check. With regard to demand deposits, there is an insignificant income from interest. It is M1 that services certain operations regarding the implementation of such an indicator as gross domestic product, and also distributes and redistributes national income, and much more.

The M2 money supply within the financial markets of developed countries refers to money market mutual funds, more precisely, investment companies that issue their own shares and thereby attract money, which are subsequently invested in various securities of industrial or other corporations. In general, this aggregate acts as a liquid store of value.

Savings deposits in commercial banks can be withdrawn at any time and transformed into cash. With regard to time deposits, they become available to the depositor only after a certain period. Thus, they are less liquid (unlike savings deposits).

M3 as a money supply meter

It is represented by less liquid assets, in particular, term reissue agreements, term loans in titles of money market mutual funds and eurodollars, as well as certificates of deposit. It can be said that the monetary aggregate M3 supplements M2 with significant time deposits (securities, certificates), which are easily transformed into vouchers.

What is the narrowest measure of the money supply?

The monetary aggregate M0 is represented by cash participating in the circulation process, namely:

• metal coins;
• banknotes;
• treasury notes.

Metal coins provide the ability to make minor transactions. As a rule, they are minted from inexpensive metal. The real valuation differs significantly from the nominal in favor of the latter. This is done in order to prevent the possibility of their melting down into ingots for speculative purposes.

Treasury notes are paper money issued by the Treasury. They are used mainly in underdeveloped countries, for example in the Republic of Djibouti or the Kingdom of Tonga.

Banknotes occupy a leading position in circulation.

Monetary aggregates in Russia

As you know, money in the framework of the modern economy is not only coins and banknotes, representing cash, but also checks, bank deposits and other representatives of a non-cash form.

Money supply and monetary aggregates are interrelated concepts. The latter follows from the former. This chain is formed due to the fact that the money supply can be represented as a combination of its active and passive parts. The first is cash and non-cash funds that serve the economic turnover of the country. The passive part acts as funds temporarily not used in settlements.

The components of the money supply have distinctive features in terms of the speed and ease of their transformation into cash. It is as a result of this distinction that the corresponding monetary groups (monetary aggregates) are formed. In addition, each subsequent unit complements the previous one, subject to several amendments. In Russia, this allocation is carried out by the Central Bank.

The structure of monetary aggregates in our country is as follows:

1. M0 - coins and banknotes involved in the circulation process.
2. M1 = M0 + funds on current, settlement and special accounts of companies, household deposits placed in banks on demand, funds of insurance companies.
3. М2 = М1 + compensations and fixed-term bank deposits of households.
4. М3 = М2 + bonds and government loan certificates.

The difference between the above structure and the foreign version of its representation

In general, monetary aggregates in Russia do not have significant differences from the American classification of these concepts. However, in the USA, as a rule, the M0 aggregate is not distinguished, and M3 has a more detailed distinction.

Thus, the first grouping in the US is represented by cash. The M1 monetary aggregate supplements the M0 grouping with demand deposits, checking deposits and traveler's checks. The M2 group, in addition to the above components, includes shares of the VFDR and term deposits in the range of 100 thousand dollars. The M3 unit (except for those included in the previous monetary group) consists of term deposits with a face value of more than 100 thousand dollars, commercial securities. In the American structure, there is a fifth aggregate (L), which includes, among other things, government securities.

So, we can summarize all of the above and conclude that the money supply and monetary aggregates are closely intertwined, more precisely, the second concept together forms the first.

How much money does the economy need to ensure adequate development of the country?

The value of monetary aggregates is calculated in the framework of the classical quantitative economic theory formulated by I. Fisher and A. Marshall. According to her, the value of money is in a certain dependence on their quantitative component.

I. Fisher formed an equation that reflects the indicated dependence:

M x V = P x Q, where

V is the speed of the supposed circulation of money;

Q - the volume of goods sold;

M - the value of the money supply;

P is the total indicator of commodity prices.

Based on the above formula, you can determine the desired value of the required money supply. It is equal to: M = P x Q: V.

What determines the value of the money supply?

It is associated with three indicators, in particular:

1. The price of the total volume of goods produced and offered for sale.
2. The average price level in a particular country.
3. The speed of circulation of money.

If, for example, the money supply makes one turnover, i.e., the income of the corresponding economic entities goes to purchase goods, and subsequently returns in the form of the same income back, then one conditional value of the money supply will be required. And then, if it makes not one, but three revolutions, it will take three times less money. In the case of an increase in the money supply to the limits exceeding the allowable level, inflation occurs.

The concept of liquidity in relation to the aggregates under consideration

Money primarily acts as a universal measure of the economic value of the corresponding market goods. They are used as a means of payment for any of the goods sold.

Money is associated with such a concept as liquidity - a property of assets in a market economy. So, any asset can be a means of payment. The difference is only in the costs associated with the process of its exchange for the purchased good.

Exchange costs are commonly referred to as transaction costs.

Thus, assets can be classified according to the degree of liquidity. The leader in this regard is, of course, cash, which has the property of direct exchange with zero costs. The liquid approach is the basis for such a concept already discussed earlier as monetary aggregates - a grouping of liquid assets to calculate their total value.

The most liquid assets from the point of view of the Central Bank of Russia are:

1. Cash form of money, including money in cash desks of commercial banks.
2. Funds of commercial banks placed on the corresponding correspondent accounts with the Central Bank.
3. Funds in deposit accounts of the Central Bank.
4. Funds of commercial banks held in the mandatory reserve fund of the Central Bank.

What are the main functions of money?

There are only three of them, namely:

• medium of exchange;
• a means of accumulating wealth or savings;
• the measure of value.

Money and monetary aggregates are two basic concepts that are central to a broader category such as the money supply.

Control over their quantity is carried out by the state within the framework of monetary or monetary policy. As mentioned earlier, this function is entrusted in Russia to the Central Bank, and monetary aggregates (M0, M1, M2, M3) act as measuring instruments.

In the aspect of macroeconomic analysis, the M1, M2 groupings are most often used. Also, sometimes such an indicator of cash as “quasi-money” is distinguished, which has the designation QM and is the difference between the aggregates M2, M1. It is represented by savings and time deposits, therefore, M2 can be expressed as the sum of M1 and QM.

The dynamics of monetary groupings depends on a number of factors, including the movement of the interest rate. Thus, if the rate rises, then the aggregates M2, M3 can significantly outperform M1, due to the fact that their constituent components generate income as interest. Recently, the M1 grouping has begun to include new types of deposits that generate income as interest, and this thereby smooths out the difference in the dynamics of monetary aggregates due to the movement of the interest rate.

Within the framework of Russian statistics, the following narrow interpretations of the main monetary aggregates are used, namely:

• M1 - "money";
• QM - "quasi-money" - savings and time deposits;
• M2 - "broad money".