The money supply is the total money in circulation in a country. It includes all cash, bank savings, current, and fixed deposit accounts, as well as short term securities such as treasury bills. The money supply is monitored to avoid certain economic deterrents such as inflation. In this article we examine five factors that affect money supply.
1. International trade
Trade between two or more countries can either increase or reduce money supply. Where a country imports more than its exports, this increases the amount of money required to meet demand for imported goods. High demand for a country's currency increases its supply and leads to devaluation of the currency against the dollar.
2. Central Bank policy
If it is the intention of the central bank of the country to increase the supply of money, it will pump more money into the economy. However, a policy of retraction will lead to policies that will reduce the money supply. One way the apex bank can increase or decrease the amount of money in circulation is through the monetary policy committee meetings.Â
3. Interest rate
The interest rate for loans is a core determinant of the money supply. An increase in interest rate will discourage deficit economic agents to seek for more funds through the commercial banks. While the opposite is true for a fall in loan interest rate.Â
4. Fiscal policy
Aside from the central bank, government policies can also impact the money supply. If the government embarks on infrastructure projects, providing financing for the citizens through its bank of industry, or it borrows more money from the world bank. It will increase money supply in the economy.
5. MPC decision
The decision made by the monetary policy committee is another factor that affects the supply of money in an economy. If the committee decides to increase the monetary policy rate, the total money in circulation will decrease. And if the rate is reduced, supply increases.
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