Determinants of the money supply, Managerial Economics

Determinants of the money supply

Two extreme situations are imaginable.  In the first situation, the money supply can be determined at exactly the amount decided on by the Central Bank. In such a case, economists say that the money supply is exogenous and speak of an exogenous money supply.

In the other extreme situation, the money supply is completely determined by things that are happening in the economy such as the level of business activity and rates of interest and is wholly out of the control of the Central Bank.  In such a case economists would say that there was an Endogenous money supply, which means that the size of the money supply is not imposed from outside by the decisions of the Central Bank, but is determined by what is happening within the economy.

In practice, the money supply is partly endogenous, because commercial banks are able to change it in response to economic incentives, and partly exogenous, because the Central Bank is able to set limits beyond which the commercial banks are unable to increase the money supply.

Posted Date: 11/29/2012 4:45:31 AM | Location : United States

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