Abstract
This study aims to conduct a theoretical analysis on the potential and ability of the traditional money supply function to explain the money supply developments in the Libyan economy post-2013, and the study also aims to search for an alternative formula that has ability to describe the factors affecting the money supply in Libya. The descriptive analysis method, mathematical equations and simple charts with statistical tests was used to examine three principle hypotheses proving the inability of the traditional formula to explain the economic variables affecting the Libyan money supply and found that the money supply function in Libya differs from the money supply function mentioned in the literature, and two main reasons for that difference are: the interest rate abolition, law No 1 (2013), and the financial crisis that the Libya is going through during study period. The money supply function for Libya illustrates that the change in money supply resulted from the change in the monetary base (MB) and no role for commercial banks in creating money process and the nominal money supply (MS) is related to a positive relationship with the central bank credit to government (COG) and a negative relationship to the exchange rate of LYD in the black market The results also showed that the relationship between the central bank’s decisions to expand money supply is linked to fiscal policies, not to monetary policies, in other words, the strong relation between COG and MS means that the monetary policy is dependent on fiscal policy. Keywords: Money Supply, New-function, Libya