Re: How Much Money to service New Wealth?

On Mon, 4 Feb 2008 09:26:02 -0800 (PST), Lantern
<lantern01@xxxxxxxxxxxx> wrote:

On Feb 4, 2:01 am, kalih...@xxxxxxxxx wrote:
On Feb 2, 12:56 am, Lantern <lanter...@xxxxxxxxxxxx> wrote:

On Jan 30, 9:32 pm, kalih...@xxxxxxxxx wrote:

I am curious about the amount of money needed to service new wealth
created due to GDP growth and inflation. Take for instance a country
like India. Assuming a current GDP of $1000 billion, an inflation rate
of 6% and growth rate of 9%, a year later it will have % more services
and goods i.e. $ 150 billion worth of addtional goods and services. So
much money the government can create to retain 6% inflation?

If you could distinguish between currency and credit the answer might
available. How much currency would be needed? How much credit would be
needed?

You mean Government can make available money either by credit or by
creating currency to service additional goods and services. Either way
I am interested to know how much money is needed to keep the
equilibrium.

thanks

Example: 1. How much currency is needed? The amount of currency needed
is easy. Enough currency to support commerce and trade. The demand for
currency is obvious...banks order currrency from the FED as required
to support demand for currency from customers...an inventory control
problem. Banks know how to do this. When was the last time you went to
the bank and they were out of currency..even in the right
denominations. 2. How much credit is needed? This should be your
question. Enough to support commerce and trade?...This answer doesn't
work. The supply of credit depends on the ability to carry the debt.
As you can see I'm lost (but I don't feel bad...I don't think the
money experts know either) . But I think the answer is out
there....keep asking....:)

Here's a way to get started thinking about the answer. Money supply
(M/P) and money demand (L(y,i)) have to balance. Money supply is the
nominal money stock (M) over the price level (P). Money demand depends
on real GDP (Y) and nominal interest rates (i), and maybe other things
too - but let's start with assuming those other things aren't
changing.

If inflation is 6% then P will be six percent higher. So from that
source, we need a 6 % higher M. Higher GDP raises money demand. The
amount of the increase depends on the income elasticity of money
demand. One approximation is the quantity theory, with income
elasticity equal to one. In this case, money demand rises 9 percent,
so you need a total increase in money supply of approximatly 15
percnet (6% + 9%). If the income elasticity is only 0.7, then the
second source would require 6.3 %, so the total answer would be a bit
over 12 percent.

-*** Startz
.