Money Supply 2

Money Supply

Ignoring the different types of deposits and the different
distinctions between the different measurements of money supply,
a country’s money supply simply consists of currency in the hands
of the public deposits at banks:

M = C + D

In order for us to understand what affects a country’s money supply
we need to take a look at (i) the mechanism by which the central
bank and the commercial banks “create” money; (ii) understand
that the actions of the central bank has a multiplier effect on the
money supply. At the end you will understand why in practice the
central bank cannot always control money supply precisely.
In a 100% reserves banking system, all deposits are held by
commercial banks as liquid assets to meet customers withdrawal.

These liquid assets (currency in the banks’ vaults) that are held are
termed the banks reserves.