Economics S3

• Primary expansion of money supply

  Changes in money supply resulting from new deposits being deposited into the banking system, increasing bank reserves and allowing them to lend more
• Secondary expansion of money supply

  Changes in money supply resulting from the credit creation process
• Factors causing primary expansion of money supply

  • Public debt policy (government borrowing)
  • Foreign aid
  • Remittances
  • Export earnings and import payments
  • Open market operations
  • Interest rate
  • Moral suasion
• Effects of primary factors on money supply

  1. Government budgetary transactions (budget deficit or surplus)

  2. Foreign aid

  3. Remittances

  4. Export earnings and import payments

  5. Open market operations

  6. Interest rate

  7. Moral suasion
• Budget deficit


  Borrowing to cover deficit leads to increase in money supply
• Budget surplus


  Withdrawal of money from the economy leads to decrease in money supply
• Foreign aid


  Increase in foreign aid increases money supply, decrease in foreign aid decreases money supply
• Remittances


  Transfer of money from migrant workers to home countries, increase in remittances increases money supply
• Increase in export earnings

  Increases money supply
• Increase in import payments


  Decreases money supply
• Reserve bank sells government bonds and securities

  Decreases money supply
• Reserve bank buys bonds and securities

  Increases money supply
• Increase in interest rate


  Decreases money supply
• Decrease in interest rate

  Increases money supply
• Moral suasion


  Non-official tool of monetary policy used by governments to persuade financial institutions to follow suggested guidelines on credit availability and cost, leading to increase in money supply
• Crowding out of investment


  When government borrowing from the private sector leads to a reduction in private investment