Glamor Economics

Chapter 111

Chapter 15 Section 2 Opening up the Channel of Commodity Trading——Currency Circulation

Currency circulation refers to the movement of money as a constantly repeated exchange of positions between buyers and sellers as a means of purchase.Currency circulation is based on commodity circulation and serves commodity circulation.The amount of money in circulation must meet the needs of commodity circulation, and currency circulation must adapt to commodity circulation. This law is called the law of currency circulation.

When the interest rate offered by the bank is high, people deposit money in the bank, and when the interest rate is low, people are more willing to hold cash.Therefore, the public's demand for money is inversely proportional to the level of interest rates.In this sense, interest rates are effectively the price of money.Of course interest is not used to "buy" currency.It's just buying the liquidity of currency.

Currency circulation is also affected by income levels.In daily life, we can observe that rich people with high income generally spend more money because they have more expenses to pay.The same is true for the entire national economy of a country. An increase in gross national income means that the public needs to spend more money to pay for increased consumption or investment.Generally speaking, the demand for money is high when the economy is overheating, and the demand for money is small when the economy is in recession.The demand for money is directly proportional to the level of gross national income.

The quantity of money demanded is also closely related to the price level.All else being equal, the higher the price level, the more money the masses will need to pay for their normal expenses.Therefore, the demand for money is directly proportional to the price level.

When it comes to currency circulation, we cannot fail to mention the concept of currency multiplier.The so-called money multiplier means that in the process of money supply, there is a multiple expansion or contraction relationship between the initial money supply of the central bank and the final social currency circulation, which is commonly referred to as the multiplier effect.

The size of the money multiplier determines the size of the money supply expansion capacity.The size of the money multiplier is determined by the following four factors:

1. Statutory reserve ratio.The statutory reserve ratios for time deposits and demand deposits are directly determined by the central bank.Generally, the higher the required reserve ratio, the smaller the money multiplier; conversely, the larger the money multiplier.

2. Excess reserve ratio.The ratio of the reserves held by commercial banks exceeding the statutory reserves to the total deposits is called the excess reserve ratio.The existence of excess reserves correspondingly reduces the bank's ability to create derivative deposits (deposits created by banks from issuing loans), so the higher the excess reserve ratio, the smaller the money multiplier; conversely, the larger the money multiplier.

3. Cash ratio.The cash ratio refers to the ratio of cash in circulation to demand deposits in commercial banks.The cash ratio is negatively correlated with the money multiplier, the higher the cash ratio, the smaller the money multiplier.

4. The ratio between time deposits and demand deposits.Generally speaking, when other factors remain unchanged, the money multiplier will increase if the ratio of time deposits to demand deposits increases; otherwise, the money multiplier will decrease.

[links to related words]

Credit Expansion Credit expansion primarily begins with the crediting and capitalization of money.With the development of the economy, paper money and credit currency replaced metal currency, which is the credit process of currency; and with the emergence of stocks and bonds, currency has become a financial investment tool, which is the so-called capitalization process of currency.The credit and capitalization of money is the initial form of the virtual economy, which no longer has a corresponding relationship with the real economy. This phenomenon is called credit expansion.

(End of this chapter)