In what way does a central bank increase the money supply in an economy?

In general, modern central banks such as the ECB or BoE tend to use interest rate targeting as a way of tightening or loosening monetary policy, however occasionally the money supply is manipulated instead. This occurs through the use of open market operations. This entails the purchasing or selling of bonds in the public markets (using created currency in the case of buying). When buying bonds new money is put into the financial system leading lower interest rates and hence a boost in consumption, and when selling money is taken out of the system shifting the money supply curve left and raising rates.

Answered by Edward R. Economics tutor

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