Money Supply and the Role of the Central Bank

This chapter discusses the money supply process by the central bank. In most countries, the short-term interest rate is used as the instrument of monetary policy. There are three operations of a central bank that affect the monetary base: open market operations, discount window operations, and foreign currency operations. The typical balance sheet of a central bank is shown as an example, with assets and liabilities. Professor Larraín goes on to explain the prime determinants of a money multiplier, which include individuals and commercial banks, and which are determined by two basic elements: the coefficient that measures the preference for cash in relation to deposits and the share of the deposits received that is maintained as reserves by banks.

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