M1, M2 and the Importance of Banking Deposits in the Money Supply
The aim of this paper is to describe different elements of the money supply, especially the M1 and M2 monetary items, as well as the importance of Banking Deposits for the Money Supply for a particular country. As it will be described below, the quantity of money present on the market is important for a country's development and in most of the cases, it is a governmental control measure for keeping inflation and unemployment at low levels. A low level of money supply induced by the central authority with different measures, like the level of mandatory reserves, discount rate, has the purpose to slow down the national economy and reduce inflation. On the contrary, a high level of money supply present on the market will boom the national economy, creating new working places, therefore reducing unemployment and other negative social aspects.
The need of liquid monetary instruments within an economy is vital for its future performance, as economic entities must meet the contractual obligations (for example, pay on time for the acquired merchandise). Individuals decide to deposit their savings within banks or to invest them in personal or corporate projects. Among the incentives an ordinary citizen receive in respect to the investment direction of his savings is the interest rate used by national banks, and consequently by the commercial banking institutions. For example, a country with a high level of saving may offer extra opportunities for entrepreneurs in the form of bank credits, loans of other form of financing. This is the reason why the central bank has to adopt a monetary policy by which it could enable a stabilization of the money supply, within an equilibrium level in respect to the Money supply. The surplus of monetary supply creates inflation, while a deficit of money supply creates deflation. Some of the consequences of this measure would be that companies would not be able to pay with cash their employees, the commercial relations within corporation would be based on barter or bank transfers, rather than cash transactions. Due to the above mentioned reason, the level of M2 within an economy is very useful to be monitored. Banks play a crucial role within an economy due to their two main operations: depositing and lending funds. Importance of Banking Deposits in the Money SupplyMoney supply is a tool that dictates the performance of an economy. As it was previously stated, the liquidity within an economy can be reduced by increasing the nominal interest rate, and so people would be encouraged to deposit their extra money in bank deposits. A gloomy idea would be to decrease the liquidity level within an economy lower than the minimum level. On the contrary, in case of low interest rates, individuals would tend to invest their funds in own projects, hoping to obtain a return rate higher than the one offered by the banks for their deposits. The entire economic functioning of a country is influenced, to a large extent, by the level of saving within that nation.
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