Is the money supply endogenous or exogenous?

Two schools of economic thought (Keynesian School and Chicago School) considered money supply as an exogenous variable, while the new Keynesian school considered it as an endogenous variable.

Why is money supply endogenous?

The supply of money is considered endogenous in this view as it is determined by firms’ need to pay for the costs of production. The production decisions of companies generate the demand for loans (Moore, 1988).

What is exogenous money creation?

Exogenous money creation is based on the money multiplier however it is not a process of money creation. Instead, it is a structure of monetary policy, in which money creation is done endogenously through bank loans and rise in foreign assets made by banks which at the same time creates new bank deposits.

What is the difference between endogenous and exogenous?

An endogenous variable is a variable in a statistical model that’s changed or determined by its relationship with other variables within the model. Endogenous variables are the opposite of exogenous variables, which are independent variables or outside forces.

What is the meaning of money supply?

The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.

Why is endogenous money neutral?

In a system with financial assets that can be created from thin air the money supply is endogenous. The neutrality of money assumes that changes in the money supply affect nominal variables and not real variables.

Why is government spending exogenous?

Investment expenditure, government expenditure, and net exports are all set to be exogenous variables in this model, meaning that they do not vary with the current level of real GDP and so must be determined by external forces such as government policy and foreign exchange.

What is meant by exogenous money supply curve?

4.2.2 Exogenous money supply curve. When the money supply in the economy is exogenous, it is said to be determined by. the banks’ preferences for excess reserves, ed, and the depositors’ preferences for. holding cash, and these preferences are not affected by economic variables like. interest rates.

Why is money supply important?

Effect of Money Supply on the Economy An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production.

How is money supply measured and why?

The money supply is the total quantity of money in the economy at any given time. Economists measure the money supply because it is directly connected to the activity taking place all around us in the economy. M2 = M1 + small savings accounts, money market funds and small time deposits.

What does money neutrality mean in economics?

The neutrality of money, also called neutral money, is an economic theory stating that changes in the money supply only affect nominal variables and not real variables.

Is government spending endogenous or exogenous?

In general one asks the question of how the endogenous variables change when one or more exogenous variables change. Remember, in our simple model above the only exogenous variables are government spending and the interest rate.