Money, Banking, and Financial Markets Practice Test: The Money Supply Process — Flashcards

The money supply process is the mechanism that determines the level of money supply. It involves: Clearing checks, Issuing new currency, Withdrawing damaged currency from circulation, and Managing and making discount loans to banks. 

The money supply process includes four items: Currency in circulation, Reserves, Securities, and Loans to banks. 
The formula for money supply is MS = (MB x MM). MB, or monetary base, is the amount of money in circulation or available to be circulated. MM is money multiplier, which is calculated by dividing 1 by the required reserve set by the Federal Reserve. 
The money multiplier is the maximum amount of new money created by banks for every dollar of reserves. It's calculated as the reciprocal of the reserve requirement ratio set by the central bank.