Реферат: What Is Money Essay Research Paper What

To calculate its level, the formula below is used. Here, C is the amount of

currency, D is the number of total deposits, and R is the desired level of

reserves. The multiplier will therefore be: (C+D)/(C+R) As C+D equals

the money supply (M) and C+R equals the monetary base (B), the level of the

multiplier will be the money supply divided by the monetary base. With this

figure, the formula can be rearranged so the amount the money supply is

increased by this process is shown. It is M=mB. A criticism of

the money supply multiplier is that people?s desire to deposit is not very

stable, although it has been suggested that changes in interest rates may

affect the volume of withdrawals and deposits. The supply of

money may also be affected by the central bank, which in the UK is the Bank of

England. Firstly, the central bank could do this by setting a required reserve

ratio, which would restrict the ability of the commercial banks to increase the

money supply by loaning out money, as the money suppler multiplier would be

reduced. If this requirement were above the ratio the commercial banks would

have wished to have, then the banks will have to create fewer deposits and make

fewer loans then they could otherwise have profitably done. If the central bank

imposed this requirement in order to reduce the money supply, the commercial

banks will probably be unable to borrow from the central bank in order to

increase their cash reserves if they wished to make further loans. They might

try to attract further deposits from customers by increasing their interest

rates, but the central bank may retaliate by increasing the required reserve

ratio. A similar way

the central bank can affect the supply of money is through special deposits.

These are deposits at the central bank which the banking sector is required to

lodge. These are then frozen, thus preventing the sector from accessing them,

although interest is paid at the average treasury bill rate.? Making these special deposits reduces the

level of the commercial banks? operational deposits, which forces them to cut

back on lending. In the UK, special deposits have not been used since the