Money Variables

Money Variables

Subject :Economy

Context:

Note in circulation (NiC) increased by 7.98% as of December 2, 2022.

Concept:

Currency in Circulation (CiC) refers to currency notes and coins issued by the central bank within a country that is physically used to conduct transactions between consumers and businesses.It is a major liability component of a central bank’s balance sheet. Thus, Currency in circulation comprises of:

• Currency notes and coins with the public
• Cash in hand with banks.
  • RBI’s definition, currency with public is arrived at after deducting cash with banks from total currency in circulation (CiC).

The demand for currency/money:

• Demand for money is commonly associated with cash or bank demand deposits.
• The demand for money explains people’s desire for a specific amount of money.
• Motives for Demanding Money
  • Transaction Motive
    • It refers to the demand for money to meet the current needs of individuals and businesses.
    • Individuals require money to meet their immediate needs, which is referred to as the income motive. Businesses, on the other hand, require money to carry out their operations, which is known as the business motive.
  • Precautionary Motive
    • It refers to people’s desire to save money for various contingencies that may arise in the future.
    • Unemployment, sickness, and accidents are examples of contingencies.
    • The amount of money required for the precautionary motive is determined by a person’s nature and living conditions.
  • Speculative Motive
    • The speculative motive for demanding money arises when holding money is perceived to be less risky than lending the money or investing it in another asset.
    • It refers to the motivation of individuals to hold cash in order to profit from market movements regarding changes in future interest rates.
    • For example, if a stock market crash appeared to be imminent, the speculative motive for demanding money would come into play; those anticipating a crash would sell their stocks and keep the proceeds as money.
  • The precautionary and speculative motives serve as a store of value for various purposes.

Factors Affecting Demand for Money

• Interest Rates– interest rates are earned on alternative assets such as bonds. People hold less money when interest rates rise relative to the rates available on money deposits. People hold more money when interest rates fall.
• Technological Changes-Technological changes such as debit cards make the importance of holding cashless important.People who have easy access to current accounts may be able to keep less cash on hand. Thus, keep less money on hand when new technologies make it easier to convert wealth into money.
• Availability of Credit-If credit becomes more widely available, precautionary demand for money will fall as people believe they can borrow – even if they face short-term difficulties.
• Irrational Behavior of Asset Prices/ animal spirits-Markets can go through booms and busts as a result of psychological factors such as over-exuberance.During these bubble periods, demand for assets rises while demand for holding money falls.
• Changes in National Income-When real GDP rises, more goods and services are available for purchase. They will cost more money to purchase.A fall in real GDP, on the other hand, will cause the money demand curve to fall.
• Changes in the Price Level (inflation or deflation)-If the price of everything increases by 20%, you will need 20% more money to buy things. When the price level rises, the demand for money rises as well.

The money supply is the total stock of money circulating in an economy. In the most simple language, Money Supply is Currency in Circulation plus Deposits in Commercial Banks.

Monetary supply  aggregates (Types of money supply)

• Reserve Money (M0):-Reserve money is also called central bank money, monetary base, base money, or high-powered money.
  • In the most simple language, Reserve Money is Currency in Circulation plus Deposits of Commercial Banks with RBI.
  • Mo = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI
  • It is the monetary base of the economy.
• M1 (Narrow Money) =Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
• M2=M1 + Savings deposits with Post office savings banks.
• M3 (Broad Money) = M1+ Time deposits with the banking system
• M4 = M3 + All deposits with post office savings banks

Factors affecting money supply:

The quantum of cash or banknotes in the economy depends on the requirement for meeting the demand for banknotes due to GDP growth, inflation, replacement of soiled banknotes and growth in non-cash modes of payment.