monetary base and hence, the money supply.1. Reserve Requirements Ratio (RRR): By changing RRR, the CB can make money easy or tight and affects the amount of reserves banks must have, relative to their deposits. If RRR is increased, then less loans can be made and less deposits are created by the banking system. As a result, the money supply contracts. Likewise, if the RRR is reduced, more loans and more deposits can be generated by the banking system, increasing the money supply.2. Discount Rate: By changing the rate the CB charges to banks for its loans, the CB can influence the cost of having too few reserves. If the discount rate is increased, banks are less willing to make loans but keep more as liquid assets and excess reserves. As a result, there is less and less deposit creation through lending activity. This, in turn, reduces the money supply. Just the opposite holds true, if CB operates a discount window on easy terms, such that banks can make more loans as they need less liquid funds and excess reserves to meet unexpected withdrawals.3. Open Market Operations (OMO): The most important and frequently used monetary policy instrument by the CB. In an open market operation, the CB buys or sells g-bonds to banks and the public. If the CB sells g-bonds, public and the banks use their currency/demand deposits (for the public) and the excess reserves (or by calling in loans for the banks) to purchase these securities, as a result, less money can circulate, and be deposited in a bank which reduces the money supply. On the other hand, if the CB purchases bonds from the public and the banks, more reserves are available for loans and deposit creation. Hence, the money supply increases.Bank Money Creation in a Fractional Banking SystemThe combined balance sheet of the banking sector in Granada is given as follows. Also assume that the money supply (M1) consists of deposits and money in circulation and the required reserve ratio is 10%...
