Money supply refers to the whole amount of money that is circulating in an economy, in the form of currency, coins, notes, money in deposit accounts, and other liquid assets. When money supply increases, the purchasing power of the majority of the population increases, as people have more money to spend. As such, the direct effect is an increased demand for goods and services. Alternatively, because there will be an increase in the amount of money that people can hold, some people will want to keep their excesses in depository institutions. This then encourages these institutions to want to lend more as their money reserves increase, resulting in lowered interest rates. Money supply is determined by the Federal Reserve Bank and other member banks.
Also, as has been explained by other educators, money, like any other commodity, obeys the laws of demand and supply. When depository institutions decrease interest rates, then the cost of accessing loans is reduced. The effect is that more money is in circulation since people are encouraged to take loans out because of the low rates of interest.