Describe how each of the following can affect the money supply: (a) the central bank; (b)banks; and (c) depositors

(a) The Central Bank: The central bank of a country can affect the money supply through its monetary policy. If the central bank wants to increase the money supply, it can do so by lowering interest rates, which encourages borrowing and spending. Conversely, if it wants to decrease the money supply, it can raise interest rates, which discourages borrowing and spending. The central bank can also affect the money supply through open market operations, which involve buying and selling government securities. When the central bank buys securities, it injects money into the economy, increasing the money supply. When it sells securities, it takes money out of the economy, decreasing the money supply.

(b) Banks: Commercial banks can also affect the money supply through the process of credit creation. When a bank gives out a loan, it creates new money. This is because the money that is loaned out is then deposited back into the banking system, and a portion of that deposit can then be loaned out again, creating even more money. This process can continue multiple times, leading to a significant increase in the money supply. Conversely, when loans are paid back, the money supply decreases.

(c) Depositors: Depositors can affect the money supply through their decisions to hold money in cash or in bank deposits. When depositors choose to hold more money in cash, the money supply decreases because banks have less money to loan out. Conversely, when depositors choose to hold more money in bank deposits, the money supply increases because banks have more money to loan out.