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Federal Reserve Bank of Minneapolis Quarterly Review Vol. 19, No. 3, Summer 1995, pp. 2 11 Some Monetary Facts George T. McCandless Jr. Warren E. Weber Associate Professor of Economics Universidad
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Each of these facts is a major determinant of the interest rate, of inflation, and of the real spending power of labor and capital. In brief, the data show that the money multiplier is close to 1 and that the money stock or money growth is close to zero. In addition, the data show two trends: the money supply of an economy grows with time and increases almost as fast as the population and wages. There are also two factors that drive this growth curve: (1) growth in the stock of money and (2) inflation, which increases the stock exponentially. 1. The Money Multiplier In this article, the Money Multiplier refers to the relationship between the money supply or the increase in money as a consequence of inflating prices and changes in the money supply growth rate. In order to be more precise, we shall examine each of the three elements of the Money Multiplier, as summarized below: a) Money Multiplier 1. The Money Multiplier of Money Supply in an Economy: The Money Multiplier of money supply or the increase in the money supply as a consequence of inflation is a function of three things: c) the amount of money circulating in an economy, b) the interest rate, and c) the price level. The quantity of money, the rate of inflation, and the rate of monetary growth are in turn affected by the first two variables. (Figure 1) (See figure of the left: Inflation is a monetary change, inflation is the most dangerous phenomenon in an economy because it leads to an increase in the price level whereas deflation is less dangerous because it increases the average money supply. Therefore, inflation is the main monetary risk. On the other hand, monetary growth is the result of monetary growth, i.e., inflationary policy in an economy. However, deflation is most dangerous when the money supply grows exponentially, i.e., the quantity of currency in circulation becomes more than the inflation rate. See also the “Banking and Finance” chapter.) (Figure 1) The quantity of money and its growth (the Money Multiplier of money supply, shown on the right side of the graph) are influenced by the interest rate or the interest rate rate rate.

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