The money supply is decreased when the government issues bonds because If it sells bonds in the open market, it will result in a decrease in the money supply.
By reducing the requirement for reserve requirements, banks can lend more money and increase the money supply of the economy as a whole. Conversely, by increasing bank reserves, the Fed can reduce the money supply.
By buying and selling government bonds (usually bonds), the Fed (or central bank) affects the money supply and interest rates. For example, if the Fed buys the Treasury, the Fed pays itself by drawing a check. So the first thing that happens when the money supply goes down is that interest rates go up. As interest rates rise, companies are less willing to invest to borrow money for capital investment.
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