The central bank can manage the size of its balance sheet.

a. The central bank can increase the size of its balance sheet, raising reserve liabilities and expanding the monetary base, through:

i. Open market purchases of domestic securities.

ii. The purchase of foreign exchange reserves (in the form of bonds issued by a foreign government).

iii. The extension of a loan to a commercial bank.

b. The central bank can decrease the size of its balance sheet, lowering reserve liabilities and reducing the monetary base, through the sale of domestic or foreign securities.

c. The public’s cash withdrawals from banks shift the central bank’s liabilities from reserves to currency and shrink the size of the banking system balance sheet.