Nigel and Luthfi
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Money supply is the total amount of funds in an economy
that can be used as a medium of exchange, a measure of
value, a store of value and a method of deferred payment.
Money is used to buy your
daily necessities take it as
that. And everyone’s
money in one particular
economy adds up to the
money supply of the
economy.
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Reserve Banks measure of money is M3
M3 = consists of money base plus all bank deposits.
[Money Base + Bank Deposits]
Money Base: holdings of notes and coins by the private sector+
deposits of banks with the RBA.
Broad Money = M3 and deposits in non-bank financial
intermediaries [NBFI] minus holdings of bank deposits
[M3 + deposits in NBFI’s – NBFI bank deposits]
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Since credit can act as a medium of exchange, it will be a
good indicator for potential future spending
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It indicates that the economy is going to grow that is why
the RBA uses it.
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The higher the rate of credit growth, the higher the
potential future spending, therefore better economic
growth.
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Currency only accounts for 5% of the money supply because
the other 95% is the deposits in banks.
This leads to the same money is being used over and over
again. This is called credit creation where the 95% of the
money supply are lent out for people to spend.
The money which is stored in the bank does not necessarily
have to be there and so is called credit. The money being
received by sellers might be put into the bank to then be relent again.
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The Australian money has increased over the last 10
years.
The amount of money which is in the economy has
increased and grown over the 10 years.
Basically, money aggregates have been growing for
the last 10 years because the economy has been
growing.