4. Money supply basics The following is a dialogue between two economics students who are studying for a test. Assuming that Beth correctly explains the money supply, fill in the blanks. ANDREW: I was late to the lecture. Did the professor say the narrow definition of money supply is just equal to the amount of currency in circulation plus traveller's cheques? BETH: No! The money supply is actually equal to the sum of currency, traveller's cheques, and ANDREW: And what are those again? BETH: Those are the ANDREW: Can the Bank of Canada control that? BETH: Well, they can indirectly control it by adjusting the , because that affects the fraction of deposits that banks . The higher it is, the total money the banks can lend out. ANDREW: And how does that change the money supply? BETH: When you deposit money in your account, your bank can lend it to me. Afterward, counted as part of the money supply. ANDREW: OK, I think I understand the Bank of Canada's role now. BETH: Just remember that the Bank of Canada can't completely control the money supply. Banks can choose to hold reserves thanplia Homework: Money and the Banking System BETH: No! The money supply is actually equal to the sum of currency, traveller's cheques, and ANDREW: And what are those again? BETH: Those are the ANDREW: Can the Bank of Canada control that? BETH: Well, they can indirectly control it by adjusting the ,because that affects the fraction of deposits that banks . The higher it is, the total money the banks can lend out. ANDREW: And how does that change the money supply? BETH: When you deposit money in your account, your bank can lend it to me. Afterward, counted as part of the money supply. ANDREW: OK, I think I understand the Bank of Canada's role now. BETH: Just remember that the Bank of Canada can't completely control the money supply. Banks can choose to hold reserves than the Bank of Canada specifies with the reserve requirement. Additionally, preferences for holding money affect the total amount of deposits