The term 'money supply' commonly denotes the total, safe, financial assets that households and businesses can use to make payments or to hold as short-term investment. Governmental authorities, including central banks and other bank regulators, can use various policies, mainly setting short-term interest rates, to influence the amount of broad money created by commercial banks. Money creation occurs when the quantity of monetary aggregates increase. Bank loans issued by commercial banks that practice fractional reserve banking expands the quantity of broad money to more than the original amount of base money issued by the central bank.Ĭentral banks monitor the amount of money in the economy by measuring monetary aggregates (termed broad money), consisting of cash and bank deposits. However, the majority of the money supply is created by the commercial banking system in the form of bank deposits. Central banks can increase the quantity of base money directly, by engaging in open market operations or quantitative easing.

Money issued by central banks is termed base money.

In most modern economies, money is created by both central banks and commercial banks. Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased.

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