Initially we defined the money supply as the total amount of currency held by the public

Initially we defined the money supply as the total amount of currency held by the public

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Unformatted text preview: Initially we defined the money supply as the total amount of currency held by the public. While this definition is correct, it is incomplete. In the previous section, we learned that through a fractional reserve banking system, the money supply increases. Thus, the money supply is better defined as the total amount of currency plus deposits held by the public. All available money, either in terms of currency or demand deposits, is thus accounted for. Initially, money supply was introduced as a vertical line that was only affected by Fed policies. While it is true that the Fed has the majority of the control over the money supply, our new definition of money supply indicates that the public has so me control as well, albeit unwitting: the public has the power to make deposits and take out loans. We will work through how both the Fed and the public affect the money supply through their...
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Initially we defined the money supply as the total amount of currency held by the public

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