Money and Interest Rates - The supply of money

7 important questions on Money and Interest Rates - The supply of money

What does the Londen money market consist of? Name 3. 

1. Discount and repo markets
2. The importance of inter-bank lending
3. The parallel money markets 

Name 4 causes of increases in money supply? 

1. Banks reduce liquidity ratio
2. Households and firms choose to hold less cash
3. Currency flow surplus on the balance of payments
4. public-sector deficit

In which 2 types can money supply be distinguised? 

1. Narrow money
2. Broad money
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What is the difference between narrow and broad money? 

Narrow money includes cash and balances at the central bank. Broad money includes narrow money, but also deposits in banks and and possibly various other short-term deposits in the money market. 

How can money supply be expanded? 

By expanding bank deposits. 

How can bank deposits be expanded? 

Through the a process of credit creation. If the bank's liquid assets increase, they can be used as a base for increasing loans. When these loans are redeposited in banks, they form the base for yet more loans, and thus a process of multiple credit expansion takes place. 

When will money supply rise? Name 3. 

1. When banks choose to hold a lower liquidity ratio and thus create more credit fot an existing amount of liquidity
2. When people choose to hold less cash outside the bank
3. When there's a net inflow of funds from abroad

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