Money Supply

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(c) Describe three other measures that can be used to regulate money supply.

Money supply is the entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country's government or central bank. There are a few measures that can be takes to regulate money supply. Firstly, there must be a Minimum Liquidity Ratio (MLR) to regulate money suppy. The central bank requires the commercial banks to observe a minimum liquidity requirement. And by manipulating this liquidity ratio, it can control the ability of the commercial banks to create credit, thus regulating money supply. In addition, bank rates can be used to regulate money supply. Rate of interests can be imposed which is linked to other rates of interests such as loans and savings. If the central bank were to increase the bank rate, the other rates of interest will also increase causing borrowing more costly. Thus, demands for loans reduce besides reducing credit creation which causes the money supply to reduce. Furthermore, special deposits should be allocated to regulate money supply. This measure is used by the Bank of England to reduce excessive liquidity in the country. All commercial banks have to place a certain proportion of their deposits with central bank which were not withrdrawable to reduce cash availability to create loans. This will reduce money supply.
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