Demand Deposit and Money Supply

Demand deposits are deposits made by customers in commercial banks that can be withdrawn on demand without any prior notice. They are also known as current account deposits. On the other hand, money supply refers to the total amount of money in circulation in the economy. It includes both physical currency as well as deposits in banks.

Relation with High-Powered Money

High-powered money refers to the currency in circulation and reserves held by the central bank. It is also known as the monetary base. Demand deposits with commercial banks are a part of the money supply, but they are not considered high-powered money. The reason for this is that demand deposits are created by commercial banks through the process of credit creation. When a commercial bank makes a loan, it creates a deposit in the borrower’s account, which increases the money supply. However, this deposit is not backed by high-powered money. It is backed by the bank’s reserves, which are a part of the high-powered money.

Conclusion

In conclusion, demand deposits with commercial banks are a part of the money supply, but they are not considered high-powered money. They are created through the process of credit creation by commercial banks and are backed by the bank’s reserves. High-powered money, on the other hand, is the currency in circulation and reserves held by the central bank.

Money supply