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Explain the mechanism of the money multiplier. How can the monetary authorities influence its size and the supply of money?
Finance & Accounting
Pages 6 (1506 words)
THE MECHANISM OF THE MONEY MULTIPLIER Student Institution Date Introduction This paper will aim to provide an explanation and illustration of the essential mechanisms behind the concept of money multiplier and intensively the manner monetary authorities can control its size and influence money supply in the economy…
A conclusion will then be provided of the general overview of the essay. The Reserve Ratio According to Valdez & Molyneux (2010, p. 111), different measures or dimensions can resolve on the issue of money supply denoted as M via monetary aggregates such as M2 and M4. The monetary aggregate M1 equals to the cash held household whilst M2 refers to the sum of deposit within the bound of retail banks and building societies in addition to the cash held by the household. M4 gives a broader measure of money which comprise of wholesale bank deposits and certificate deposits. These can be expressed as; M1 = Cash held by households M2 = M1 + retail banks and building society’s deposits M4 = M2 + wholesale banks deposits + certificate deposit The measures of money explained above shows the liquidity level of money held in supply even though broader measures indicate less liquidity held. The correlation amidst the bank of England, commercial banks and the households and the behavior which describes the supply of money in the form of deposit ratio of the currency and the reserve ratio. ...
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