"Whenever banks gain reserves and make new loans, the money supply <u>expands</u>; and whenever banks lose reserves and reduce their loans, the money supply <u>contracts</u>."
<h3>When does the money supply contract and expand?</h3>
By decreasing the reserve requirements for banks, which enables them to lend more money, the Fed can expand the money supply. The Fed can reduce the amount of money in circulation by increasing the reserve requirements for banks, on the other hand.
The total amount of reserves held by a bank rises with each dollar deposited into an account.
The bank will lend out the extra reserves while keeping some of the necessary reserves on hand. The money supply is increased when such a loan is made.
Banks "generate" money in this way to expand the available supply. A central bank's alteration of the money supply affects interest rates, which have an effect on aggregate demand and investment.
Therefore, expands is the answer for the first blank, and contracts are the answer for the second blank.
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