Define money and the money supply; describe the process of money creation by the banking system and the role of the central bank.

Money is a medium of exchange which has a value, it can be presented in the form of banknotes or coins.  

Money supply is the total amount of money in circulation in a particular system.

New money can be created by commercial banks in the form of new loans, which do not involve issuing physical money. For example, when a bank customer wants to take out a mortgage to purchase a property, bank is not going to give him or her money in the form of cash, instead the bank would issue virtual credits.

Meanwhile, there is a limit on how much money commercial banks can give as loans, which is determined by reserve requirements. For example, if the reserve ratio is 3%, then the bank has to keep 3% of all of its money in a deposit, that it can not give out as loans.

Central bank performs a function of controlling country's total money supply, by measuring monetary aggregates. If there is a need for new money, the central bank creates new money and injects it into the economy. By this action, the central bank creates inflation in the economy. Central bank can also decrease the money supply, which is called deflation.

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