Consequently, it is the public and not the National Bank who determines the amount of cash in circulation. Let us assume that our economy produces 10 cakes. This leads us to conclude that the value of money would decrease. Indeed, price stability contributes to a durable growth of the economy and consequently stimulates the creation of jobs. If the general price level fluctuates too much, enterprises have a hard time making the right plans for the future.
Consumers lose their faith in the economy and job creation diminishes.
Therefore, the objective of the central bank's monetary policy is price stability. In order to meet a.o. the public's demand for banknotes, commercial banks have to resort to the central bank's lending facilities. By changing the interest rates she charges commercial banks, the central bank prompts them to pass these changes on to their customers. The increase in money supply and the demand for goods and services slow down. Ultimately, this will prevent an increase in prices.