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QUESTION: What Are Factor That Affect Supply Of Money? [Solved]

Nigeria Student Forum / Questions / Marketing Department / What Are Factor That Affect Supply Of Money?

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Mathew Oluwaseun
University of Ilorin (Unilorin)
Mechanical Engineering
500Level, Nigeria.
The supply of money in a modern economy and financial system is determined by three key factors:

“Open market operations” – this is effectively the same as Quantitative Easing. The Central Bank buys government bonds, effectively creating money

The “reserve requirement” imposed on banks – this is the % of deposits made by customers at the bank that the bank must keep hold of rather than lending it out

The policy interest rate set by the central bank – the rate of interest will influence how many households and businesses are willing and able to borrow. Most money in a modern economy is created by commercial bank lending so the rate of interest ultimately does have a bearing on the supply of money

Key factors affecting the demand for money

The rate of interest on loans

The number/value of monetary transactions that we expect to carry out
The extent to which we also want to hold other financial assets, such as bonds, property, saving (this is also influenced by the rate of interest) – this is known as the speculative motive for holding money

Changes in GDP
The extent to which it is possible to use debit cards/credit cards i.e. the pace of financial innovation

The extent to which we might have to pay out large unexpected payments, for example, for i.e. the precautionary motive

The rate of anticipated inflation

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