Money supply is extremely important5 for accelerating the economic growth of a country. In order to explain the determinants of money supply in an economy we shall use M concept of money supply which is the most fundamental concept of money supply. We shall denote it simply by M. This concept of money supply is composed of currency held by the public (Cp) and demand deposits with the banks (D). Thus
M = Cp + D …(1)
Where, M = Total money supply with the public
Cp = Currency with the public
D = Demand deposits held by the public
The two important determinants of money supply as described in equation (1) are:
(a) The amounts of high-powered money which is also called Reserve Money by the Reserve Bank of India.
(b) The size of money multiplier.