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BANKS AND THE MONEY SUPPLY

So far, we have introduced the concept of “money” and discussed supply of money by buying and selling government bonds explanation of the money supply is correct, it is not complete, banks play in the monetary· system. Recall that the amount of money you hold includes both complete your pocket) and demand deposits (the balance in your checking held in banks, the behavior of banks can influence the quantity of demand deposits in the economy and, therefore, the money supply. This section examines how banks affect the money supply and how they complicate the Fed’s job of controlling the money supply.

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