The role of central banks in every country’s economic prosperity is an irreplaceable one. As a core part of a nation’s financial and monetary machinery, these institutions have helped every economy in the world maintain stability and growth.
One example of a central bank’s important contributions to their home country’s overall economic operations is their influence on money supply. It is a fact that an economy may sometimes need more money, and there are other times when it needs less – and there are specific methods that only central banks have the power to implement.
However, these methods normally depend on the amount of power bestowed in a country’s central bank and of course, the current economic weather in that country.
The American Central bank, for instance, influences the country’s money supply by directly modifying its reserve requirements. In other words, the Fed deploys a method that can affect the relationship between the number of fund banks and deposits of inbank accounts – with the goal of increasing the total supply of money in the U.S. economy.
On the other hand, if there is a need to reduce the Fed’s money supply, they have the option to sell bonds. Doing so will result in a lesser amount of money reserve to lend to its borrowers. With less money to lend, it leads to an increase in the central bank’s interest rate, affecting the value of the U.S. dollar.
Printing more money is also another method to increase a central bank’s money supply, but its consequences prevent countries to print as much as they want. This is because; the presence of more printed money makes a currency less valuable against other currencies.