ABSTRACT
In this chapter we have summarised some important features of the UK financial system and shown how these affect the ability of the government to control the money supply. In particular we have seen that government seems to be faced with a choice between interest rate stabilisation and control of the money supply. This leads to the conclusion of an interest elastic money supply function which is supported by US empirical evidence.
In summary, a generalised money supply function can be written as a function of the interest rate and the monetary base, https://www.w3.org/1998/Math/MathML"> M s = m ( R , M b ) https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9781315677064/4146b8d7-0150-4623-8d8b-5d80a5d87c5b/content/math450_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/>
and it has been demonstrated that the effect of the interest elasticity is to render monetary policy less effective.
