Money Supply, Bond Rates and Money Velocity, Essay Example

The nature of bid to cover ratio, money supply (M2) and money velocity will be explored in this research paper. The perspectives of the Federal Reserve Bank (2014), Gwartney (2008) and Irving (2010) will be explored. The qualities of the bid to cover rations, M2 and velocity of money will be demonstrated graphically and numerically.

The bid to cover ratio delineates the quantity of bonds which are bid upon in an auction in comparison to the actual number of binds which were transacted. The bid to cover ratio is an excellent method of assessing the demand for government bonds. Bonds which are issued by the government are marketed at auctions. The investors bid upon the option of acquiring a specific number of bonds at a particular price. There exist different methods of separating the bonds (Irving 15).

The most conventional method is for the individuals who place the highest bid for the bonds to acquire all of the bonds that they desire. The next highest bidder gets a certain allocation of bonds and so on. This continues to the point where everyone can acquire the bonds which they bid upon. At this rate, the bonds are distributed pro rata; this infers a quantity which is proportionate to the amount which is bid upon (Irving 15). The average bid to cover ratio had been derived for 2014 by taking the sum of the values and dividing by the number of cells.  This derived an average bid to cover ratio of 2.73. This means that there were $2.73 bid by investors for every dollar of government bonds sold.

The M 2 money supply is composed of all of the money in the United States economy which the coins and bills which are being circulated,  notes, money which is held on short time deposits and daily money market accounts. M2 is defined as broad money. The M2 money provisions include the M1 money provisions. M3 is delineated as extended term deposits which possess a maturity which is greater than 24 hours (Gwartney 266). The average rate of increase of the M2 was calculated by taking the sum of the cells on the excel spreadsheet from 14 through 544, adding the values which were contained and dividing by 530. This gave the mean monthly M2 growth rate of 6.9% monthly. This derived an annual growth rate of 82.87% for M2. The real M2 had been derived by the same process and when computed, the average monthly real increase in M2 had been 2.5549% monthly of 30.66% annually. The CPI rate of increase had been derived by taking the values in the number of cells, adding them together and dividing by the number of cells which was 530. The mean monthly CPI increase was determined to be 4.32% or 51.855% annually.

The velocity of the money is detailed as being the index at which money changes hands and the amount of money which changes hands during a particular period of time. The velocity of money is normally evaluated as a proportion of the GNP to the entire money supply. The velocity of money is a proportion of the initial gross domestic product in order to evaluate the money provisions which can be M1 or M2. The velocity of money can be delineated as the index of turnover in the money provisions. This implies the quantity of times that a dollar may be applied in order to purchase goods.

Assets held At the Federal Reserve Bank

Conclusion

The natures of the bid to cover ratio, M2 and the velocity of money have been reviewed in this essay. The application of the bid to cover proportion, the M2 provisions and the velocity of money are applied in order to study the well- being of the economy from a macroeconomic perspective. These measures are macro- economic tools which are used in conjunction with other methods in order to forecast economic trends.

Works Cited

Gwartney, James et al. Economics: Private and public choice. Mason, OH: South- Western Cengage Learning, 2008. Print.

Federal Reserve Bank.” Factors affecting reserve balances, Federal Reserve        Statistical Review, H. 4. 1”. Federal Reserve Bank, 2014. Web. 16 April 2014. http://www.federalreserve.gov/releases/h41/current/

FRED.” Velocity of M2 stock.” FRED, 2014. Web. 16 April 2014.           http://research.stlouisfed.org/fred2/series/M2V

Irving, Susan J. Debt management: treasury inflation protected securities should play a heightened role in addressing debt management challenges. Washington, DC: U.S.    Government Accountability Office, 2010. Print.