- 06/21/2019 at 2:44 am #1166444EduGorillaKeymasterSelect Question Language :
Direction : Read the following passage carefully and answer the questions given below it.
The control of the amount of money in an economy is known as monetary policy. Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually, the goal of monetary policy is to accommodate economic growth in an environment of stale prices.
A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include hyperinflation, stagflation, recession, high unemployment, shortages of imported goods, inability to export goods, and even total monetary collapse and the adoption of a much less efficient barter economy. Governments and central banks have taken both regulatory and free market approaches to monetary policy.
The money supply of a country is usually held to be the total amount of currency in circulation plus the total amount of checking and savings deposits in the commercial banks in the country. Public and private sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation and the business cycle.
The relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct relation between long term price inflation and money supply growth, at least for rapid increases in the amount of money in the economy.
Different functions of money are associated with different empirical measures of the money supply. There is no single “correct” measure of the money supply; instead, there are several measures, classified along a spectrum of continuum between narrow and broad monetary aggregates.
Narrow measures include only the most liquid assets, the ones most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc. Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures are less closely related to monetary-policy actions.
The different types of money are typically classified as “M”S the “M”s usually range from M0 (narrowest) to M3 (broadest) but which “M”S are actually used depends on the country’s central bank.
The money supply is usually measured as these escalating categories (M1, M2 and M3). The categories grow in size with M1 being currency (coins and bills) and checking account deposits. M2 is currency, checking account deposits and savings accounts deposits, and M3 is M2 plus time deposits, M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.
Another measure of money, M0, is also used, although unlike the other measures, it does not represent actual purchasing power by firm; and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country. It is measured as currency plus deposits by bank and other institutions at the central bank. M0 is also money that can satisfy the reserve requirements of commercial banks.
The relationsship between price and money is associated with:
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