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I don't understand why total money in economy increases. Where does this money come from?

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Fiat money in modern societies is usually printed (minted is the term used for stamping coin) under the authority of a particular institution, usually called Central Bank, Federal Bank, Federal Reserve etc. In different countries there are different rules that apply concerning its function and independence from central government.

Central Banks also are able of conducting monetary policy with various means and measures. In fact, more than anything, a Central Bank is charged with the responsibility of regulating the amount of money circulating in the economy.

A central bank can augment or decrement the amount of money circulating by using (1) a particular exchange rate or by directly influencing (2) money supply.

Examples:

(1) A Central Bank can change the exchange rate with which it loans commercial banks (the ones that the public most often interacts with), thereby affecting their interest in giving loans and/or the public's interest in saving or taking loans. This effectively changes money supply / the amount of money circulating in the economy.

(2) A Central Bank can buy (or sell) government bonds from (or to) the general public. This is called Quantitative Easing. Since that means that either it injects new money into the economy or that it vacuums existing money out of it, it directly changes the amount of money in circulation.

Please note:

There are many more examples to be given and a lot more clarification. Further reading can be done with my textbooks of preference, Mankiw's Macroeconomics and McCallum's Monetary Economics.

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    $\begingroup$ Thanks for the answer $\endgroup$ Jul 29, 2020 at 7:38
  • $\begingroup$ You are most welcome. $\endgroup$
    – user28226
    Jul 29, 2020 at 22:16
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    $\begingroup$ This answer is much more wrong than it is right. The vast majority of the changes in the money supply are driven by private banks making loans (creating money) and citizens repaying the principal on those loans (destroying money). User18's comment, i.e. "Money Creation in the Modern Economy" is spot on. $\endgroup$
    – Mick
    Jun 28, 2021 at 14:05
  • $\begingroup$ Mick, I am sorry to disappoint you, but I merely presented the most simple, orthodox theoretical model of money supply. Moreover, the Central Bank is also the body that governs how much the commercial banks may loan. $\endgroup$
    – user28226
    Jun 29, 2021 at 14:59
  • $\begingroup$ @S.IasonKoutsoulis Point number (2) is also not really correct. Quantitative easing is only a very special case of open market operations. OMOs are THE most important tool of central banks because only those do allow the central bank to control the amount of reserves and therefore the over night interest rate. QE is the procedure of buying assets (mainly government bonds) from banks and maybe also from the general public with the goal to flood the banks with reserves and push the interest rate at the end of the yield curve down. $\endgroup$
    – trixn
    Oct 25, 2021 at 8:24

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