1 . Distinguish between ‘broad’ and ‘narrow’ measures of money.

. Narrow measures include those more directly affected and controlled by

monetary policy, whereas broader measures are less closely related to
monetary-policy actions.[6] It is a matter of perennial debate as to whether
narrower or broader versions of the money supply have a more predictable
link to nominal GDP. Narrow measures of money focus on assets that are
used mainly as means of payment; broader measures include assets used
mainly as a store of value.
2. Why do countries usually have several official measures of money?

Official measures of money are often identified by a code number with

higher numbers indicating broader definitions than measures with a low
number. The very narrowest measure of money is the “monetary base”
which is dominated by notes and coin.
There are mainly two reasons:
The first reflects the fact that money performs a number of functions
and we are sometimes interested in one function more than another. Narrow
measures of money include only assets which are used as means of payment.
If we are interested in money’s connection with expenditure we might focus
on narrow measures. Broad money, by contrast, includes some assets which
are used mainly as savings media or stores of wealth, though most can be
turned quickly into means of payment, if we are concerned about changes in
the total stock of liquid wealth, then M4 might be more appropriate. So long
as we are interested in different aspects of money’s function we shall have to
live with several simultaneous measures.
The second reason is that what functions as money has changed over
time, and continues to evolve. This means that there is always some degree
of uncertainty about what should be included. UK buiding society deposits
were excluded from the ‘standard’ measure of broad money before 1989,
though they were included in still boarder measures. This reflected the
history of these deposits which began as a savings medium and until the
1980s were almost impossible to use for payment. Today, building societies
issue chequebooks and guarantee cards and belong to the UK payments
mechanisms. Assets whose status as ‘money’ is doubtful are often placed in
one of the very broadest measures. If and when they clearly become money,
that measure replaces an earlier one.
3 Why is the money supply endogenous
Endogenous is changes in the quantity of money is determined by other
variables within the economic system. Central banks set an official short-
term rate of interest. This then influences the rate of interest which banks
charge on loans. At this rate of interest the flow of new loans is demand
determined and to ensure that short-term interest rates remain unchanged the
central bank has to supply whatever quantity of reserves is required to
support the extra loans and the deposits they create.
4. Explain what is meant by the phrase ‘loans create deposits’
A loan does not come into existence until it is spent. And no one can spend
without simultaneously paying someone else. Thus, someone enters into
debt with a bank, and someone else must be receiving an additional in his
account. This means, deposits in a bank account can only increase if
someone deposits cash or a deposit is transferred from another account.