9.4.5—Money supply changes

The money supply can expand when banks create new deposits through lending or when central-bank and government operations add liquidity; it can contract through repayment, asset sales, tighter lending or withdrawal of deposits.

The simple money-multiplier story is conditional: banks may hold excess reserves, borrowers may not want loans, and households may change cash preferences. Capital regulation and risk appetite matter as much as reserve availability.

A central-bank asset purchase may increase bank reserves, but if firms are pessimistic and banks tighten standards, deposit creation and spending may rise little.

A reserve injection is not the same as a guaranteed multiple increase in broad money, and money growth need not translate one-for-one into real GDP.