The money supply is influenced by various factors from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
The money supply in an economy is not determined by a single factor but is influenced by a combination of various elements. These factors can range from the actions of central banks to the behavior of individuals and businesses in the economy. One of the primary factors that influence the money supply is the actions of the central bank. Central banks have the power to control the money supply through the implementation of monetary policy. By adjusting interest rates, open market operations, and reserve requirements, central banks can either increase or decrease the money supply in the economy. Another important factor that influences the money supply is the behavior of commercial banks. Commercial banks play a crucial role in the money creation process through the process of fractional reserve banking. When banks receive deposits from customers, they are only required to keep a fraction of these deposits as reserves. The remaining amount can be lent out, thereby increasing the money supply in the economy. Furthermore, the level of economic activity in an economy can also impact the money supply. During periods of economic growth, businesses and individuals tend to borrow more money, leading to an increase in the money supply. Conversely, during economic downturns, borrowing tends to decrease, resulting in a decrease in the money supply. In addition to these factors, the demand for money by individuals and businesses also plays a role in influencing the money supply. If the demand for money is high, banks may need to increase the money supply to meet this demand. On the other hand, if the demand for money is low, banks may reduce the money supply accordingly.- The money supply in an economy is a complex and dynamic concept influenced by a combination of factors such as central bank actions, commercial bank behavior, economic activity levels, and money demand. Understanding these factors is essential for policymakers and economists in managing the money supply effectively.
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