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The mechanism of the money multiplier - Essay Example

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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…

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The mechanism of the money multiplier

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. First, an overview of money measure will be put forth. Secondly, the mechanism in light of money multiplier will then be explained by use of symbols and equations to elaborate the cyclical variations in the multiplier factor. This will be followed by a scrutiny of money multiplier in the present economic environment which will be explained and lastly a description of the instruments of controlling money supply such as open market operation, reserve ratio and the discount window will be put in details to explain the impact in the size of money supply. 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. ...
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