The money supply refers to the total stock of currency and other liquid assets circulating within an economy at a specific point in time. It typically includes physical currency (cash) and various forms of bank deposits that can be easily converted into cash or used for transactions.

Central banks play a crucial role in managing the money supply through various monetary policy tools, such as open market operations:

• When a central bank seeks to increase the money supply, it buys government securities (like bonds) from commercial banks and other financial institutions. This injection of funds into the financial system increases the reserves of commercial banks, enabling them to lend more money and thus expanding the overall money supply.
• Conversely, when a central bank aims to decrease the money supply, it sells government securities to commercial banks. This action withdraws funds from the banking system, reducing bank reserves, which in turn limits their lending capacity and contracts the money supply.

Changes in the money supply can significantly influence key macroeconomic variables such as inflation, interest rates, and economic growth.