Bank money which is also called the Credit money
The commercial banks accept deposits and use them for advancing loans. The credit instruments issued by them in the form of cheques, drafts etc are also used as medium of exchange. Hence an increase in the loans advanced by commercial banks increases the supply of money. If the monetary authority desires a contraction in money supply it has to create an atmosphere in which the commercial banks reduce loans. On the other hand if the central bank wants to bring about an expansion of money supply it can create an atmosphere in which the commercial banks can expand their loans.
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