The supply of money in the economy is provided by the government in the form of coins and currency notes by the banking system in the form of demand deposits. The stock of money at any given point of time is thus determined by the government policy in conjunction with the Central Bank of the country which not only issues currency but also regulates the banking system and largely determines the flow of credit money (demand deposits) in circulation in the economy. Money supply at any point of time is thus policy determined and therefore independent of the market rate of interest. Therefore, the supply curve of money is a straight line parallel to the Y-axis at a distance equal to the money stock in the economy.
In fig OQ0 is the supply of money t any given time as determined by the government. The supply of money curve M3 is a straight line parallel to Y-axis.SUBMIT ASSIGNMENT NOW!