To understand how the Federal Reserve increase money supply, it is important to first understand the meaning of money supply, which we will think of as: money which is available (in the economy) for use.
Second, you must remember the three parties that influence the money supply:
- The Federal Reserve
- Households that deposit money
It will be easier to understand money supply if you remember that the word “reserve” implies not available to use, so it will help to notice when “reserve” appears as we’re talking about decreasing the money supply.