The money supply in circulation affects inflation.
The money supply in circulation is the money and liquid assets that are available in the economy and can be used immediately or soon in transactions. The money supply is defined from a narrow money supply to a broad one, depending on how much capital is available for use in transactions. The narrowest definition and the smallest capital is base money, i.e. deposits of credit institutions in the Central Bank of Iceland along with banknotes and coins outside the Central Bank. In broader categories of money supply, deposits are added in steps depending on how available they are for use in transactions, and finally securities issuance and UCITS in money-market instruments are added to obtain the broadest definition. The greater the money supply in circulation and the faster it grows, the greater the risk that the funds will be used to increase demand for goods and services, and the more likely it is that prices will rise and inflation will increase as a result.
What is the monetary base?
The Central Bank of Iceland's monetary base (base money) consists of banknotes and coins in circulation and deposits of credit institutions in the Central Bank.