Money Supply and Monetary Policy 

All modern societies use money as the medium of exchange. Since money can be exchanged for goods and services it also becomes a financial asset - a store of value.

There are various definitions of money stock but generally speaking money consists of financial assets with a high degree of liquidity - i.e. the assets can be quickly converted into purchasing power at a very small cost.

The monetary system of a country consists of those institutions who create such assets. Almost always the system is guided and controlled by the Central Bank of the country (in the case of India it is the Reserve Bank of India) and other banks constitute the system.

Monetary policy refers to instruments and actions designed to influence total quantity of money, interest rates and total volume of credit in the economy. As will be shown later all these affect 'real' macrovariables like GNP, capital formation, employment as also the price level. The Central Bank is responsible for formulating and implementing monetary policy.