6) Financial Aggregates by the RBA

Nigel and Luthfi

Money supply is the total amount of funds in an economy that can be used as a medium of exchange, a measure of value, a store of value and a method of deferred payment.

What is Money Supply. $_$?

Money is used to buy your daily necessities take it as that. And everyone’s money in one particular economy adds up to the money supply of the economy.

Reserve Banks measure of money is M3

M3 = consists of money base plus all bank deposits.[Money Base + Bank Deposits]

Money Base: holdings of notes and coins by the private sector+ deposits of banks with the RBA.

Broad Money = M3 and deposits in non-bank financial intermediaries [NBFI] minus holdings of bank deposits[M3 + deposits in NBFI’s – NBFI bank deposits]

How is M3 different from broad money?

Since credit can act as a medium of exchange, it will be a good indicator for potential future spending

It indicates that the economy is going to grow that is why the RBA uses it.

The higher the rate of credit growth, the higher the potential future spending, therefore better economic growth.

Why does the RBA use credit growth as an indicator for the economy?

Currency only accounts for 5% of the money supply because the other 95% is the deposits in banks.

This leads to the same money is being used over and over again. This is called credit creation where the 95% of the money supply are lent out for people to spend.

The money which is stored in the bank does not necessarily have to be there and so is called credit. The money being received by sellers might be put into the bank to then be re-lent again.

How can currency only account for 5% of the money supply!?

The Australian money has increased over the last 10 years.

The amount of money which is in the economy has increased and grown over the 10 years.

Basically, money aggregates have been growing for the last 10 years because the economy has been growing.

How have major money aggregates increased over the last 10 years?

Hehe - The End – Thanks