Money supply is usually seen as a vital factor that determines the economic activity of a given nation. Senior finance analysts are therefore keen in making and maintaining Federal Reserve reports which handles the changes in money supply. Such changes normally take two sides. The supply can either increase or decrease in the market share. Federal reserves are of great importance in economics. For instance, the reserve handles the fear of inflation due to a consistent rise in the money supply. Money market is said to be in equilibrium when the amount demanded for in the economy of a given country is equal to the amount supplied. Equilibrium in the market is very crucial in all aspects of economy. It is a determinant factor of several issues such as political stability, resource allocation within a country and also the level of profits to be realized (Wang, 2009).
From the basic definition, money supply is a measure of value of money in a given economy. The total amount also is a determining factor of the money supply. At equilibrium point, people have adequate money that they can use to purchase goods to sustain their lives. Equilibrium therefore tends to change when there is an increase in the money supply without a subsequent increase in the demand. Since the demand is not altered, the interest rates of goods and services decreases from one point to the other, hence bringing the supply and demand to a new equilibrium. In most cases, decrease in interest rates in the market economy stimulates the demand of goods and services. Consumers tend to purchase more goods and services due to availability and adequacy of the money. Availability of much money at hand with the level of production held constant makes the value of money to reduce while raising the price level of goods and services.
The quantity of goods and services demand responds to the increase in supply of money by increasing from one level to the other. Several instances of goods shortage may be witnessed as a result of increase in money supply. The consumers, using the available resources takes advantage of reduced interest rates to purchase goods in excess. It’s not surprising to find that some consumers purchase some goods and services that are not basic to them. Some might do so because they saw their friends or relatives purchasing them. Instances of political instability, inequitable resource allocation among others may be witnessed since the economy of a nation is altered with (Bagehot, 2009).
The Gross Domestic Product (GDP) is important in economy of a country. Real GDP determines the popularity of a given business. A business is said to be popular when it survives in the market despite the stiff competition fostered by their counterparts. In addition the number of customers who purchase goods and services from a given business plays a role in popularity determination. GDP may increase in a given economy or decrease. Both increase and decrease has effects on the economy of a given country. Increasing GDP results to a consequent increase in the number of consumers. Despite the increase in the number of customers, the price of production decreases from one point to the other in the aggregate demand curve. The consumers will be propelled to spend fewer amounts in the purchase of goods and services so as to save more and more money. Money demand also takes another direction due to GDP increase. The demand for money increases as a result of decreasing price level. Furthermore, the interest rate rises due to the changing position on money demand. A new equilibrium point is arrived to due to the variance in money supply and money demand. The equilibrium position moves upwards from its initial point. As a result of high interest rates of obtaining goods and services, the consumers in the markets opts for other alternatives such as purchasing the deposits from the financial institutions such as banks. In summary, its clearly portrayed that real GDP should also be kept at equilibrium so as to sustain the number of existing consumers while keeping the price of production on the other hand reasonably constant (Crescenzi and Stigum, 2007).
References
Bagehot, W. (2009). A Description of the Money Market: New York: NuVision Publications, LLC.
Crescenzi, A. & Stigum, L. M. (2007) Stigum’s money market: New York. McGraw-Hill Professional.
Wang, P. (2009). The Economics of Foreign Exchange and Global Finance. Tokyo: Dai Nippon Printing Company Limited.