Q.What are the determinants of money supply ?

Money supply is determined by high-powered money, the public's currency-deposit habit, the banks' reserve ratio and the money multiplier.

Money supply is the total stock of money (currency with the public plus demand deposits) in circulation at a point of time. Its main determinants are:

1. High-powered money (H) / Reserve money: The currency issued by the central bank plus banks' reserves. The larger the high-powered money, the larger the money supply.
2. Currency-deposit ratio: The proportion of money the public prefers to hold as cash rather than as bank deposits. A higher preference for cash reduces the money banks can lend and lowers money supply.
3. Cash-reserve ratio (reserve-deposit ratio): The fraction of deposits banks keep as reserves. A higher reserve ratio reduces credit creation and hence money supply. …