Money supply effect

The money supply effect (also: money supply income mechanism ) is triggered in economics when a balance of payments deficit or balance of payments surplus arises through foreign trade , which results in a decrease or increase in the money supply .

General

If a balance of payments deficit arises domestically due to import-bias, this leads accordingly to an increase in the money supply abroad through foreign exchange income and in Germany to a reduction in the money supply. Conversely, a domestic balance of payments surplus leads to an increase in foreign exchange stocks and thus in the domestic money supply. Therefore, exports and imports have a positive or negative effect on the domestic and foreign money supply; this is the so-called money supply effect. It is the main reason that the macroeconomic ( aggregate ) demand curve has a negative slope. The effect is based on the assumption of the Keynes interest rate effect , which takes place in three steps:

1. The increase in the price level leads to a higher demand for money ,
2. This higher demand for money increases the level of interest ,
3. The rise in interest rates lowers the demand for goods and services .

If the money supply remains unchanged, the rise in the price level leads to a shortage of money. The level of macroeconomic real expenditure is falling.

detection

Assuming unchanged technology and unchanged fiscal instruments, the following applies:

${\displaystyle {\text{reale Geldmenge}}={\frac {\text{Geldumlaufmenge (konstant)}}{\text{Preisniveau}}}}$.

In economic practice, an increase in the price level causes the real money supply to decrease , which leads to higher interest rates. These make saving more attractive and thus lower investment and consumer spending . The gross domestic product falls - equivalently, the output falls. An economic policy measure that would counteract this development would be to expand the amount of money in circulation . While it would lead to higher inflation , it would also cause interest rates to fall, which would improve credit terms . Investing and consuming would therefore be more attractive than saving. The output of the economy would increase.

Individual evidence

1. ↑ Dr. Th. Gabler Verlag, Gablers Wirtschaftslexikon , Volume 3, 1984, Sp. 1607 f.
2. ↑ Gustav Dieckheuer, International Economic Relations , 2001, p. 495