The monetary base refers to the total amount of currency in circulation held by the public and currency held as reserves by commercial banks at the central bank. It is the most liquid component of a country's money supply. When a central bank creates new funds by purchasing bonds from commercial banks, it increases the banks' reserves and expands the monetary base. The money supply is broader than the monetary base and includes other assets like checking and savings deposits that are less liquid. At the household level, the monetary base is cash and deposits while the money supply includes available credit as well.
The monetary base refers to the total amount of currency in circulation held by the public and currency held as reserves by commercial banks at the central bank. It is the most liquid component of a country's money supply. When a central bank creates new funds by purchasing bonds from commercial banks, it increases the banks' reserves and expands the monetary base. The money supply is broader than the monetary base and includes other assets like checking and savings deposits that are less liquid. At the household level, the monetary base is cash and deposits while the money supply includes available credit as well.
The monetary base refers to the total amount of currency in circulation held by the public and currency held as reserves by commercial banks at the central bank. It is the most liquid component of a country's money supply. When a central bank creates new funds by purchasing bonds from commercial banks, it increases the banks' reserves and expands the monetary base. The money supply is broader than the monetary base and includes other assets like checking and savings deposits that are less liquid. At the household level, the monetary base is cash and deposits while the money supply includes available credit as well.
The monetary base refers to the total amount of currency in circulation held by the public and currency held as reserves by commercial banks at the central bank. It is the most liquid component of a country's money supply. When a central bank creates new funds by purchasing bonds from commercial banks, it increases the banks' reserves and expands the monetary base. The money supply is broader than the monetary base and includes other assets like checking and savings deposits that are less liquid. At the household level, the monetary base is cash and deposits while the money supply includes available credit as well.
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Monetary Base
Monetary Base
the total amount of a currency that is either
circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies; it is also known as the "money base." Example
Country Z has 600 million currency units
circulating in the public and its central bank has 10 billion currency units in reserve as part of deposits from many commercial banks. In this case, the monetary base for country Z is 10.6 billion currency units. For many countries, the government can maintain a measure of control over the monetary base by buying and selling government bonds in the open market. The monetary base is a component of a nation’s money supply. It refers strictly to highly liquid funds including notes, coinage and current bank deposits. When the Federal Reserve creates new funds to purchase bonds from commercial banks, the banks see an increase in their holdings, which causes the monetary base to expand. Monetary Base and the Money Supply
The money supply expands beyond the monetary base to
include other assets that may be less liquid in form. It is most commonly divided into levels, listed as M0 through M3 or M4 depending on the system, with each representing a different facet of a nation’s assets. The monetary base’s funds are generally held within the lower levels of the money supply, such as M1 or M2, which encompasses cash in circulation and specific liquid assets including, but not limited to, savings and checking accounts. Monetary Base and the Money Supply
To qualify as part of the money base, the funds must
be considered a final settlement of a transaction. For example, if a person uses cash to pay a debt, that transaction is final. Additionally, writing a check against money in a checking account, or using a debit card, can also be considered final since the transaction is backed by actual cash deposits once they have cleared. Monetary Base and the Money Supply
In contrast, the use of credit to pay a debt does not
qualify as part of the monetary base, as this is not the final step to the transaction. This is due to the fact the use of credit just transfers a debt owed from one party, the person or business receiving the credit- based payment, and the credit issuer. Smaller Scale Monetary Bases and Money Supplies
At the household level, the monetary base consists of
all notes and coins in the possession of the household, as well as any funds in deposit accounts. The money supply of a household may be extended to include any available credit open on credit cards, unused portions of lines of credit and other accessible funds that translate into a debt that must be repaid. Money Creation
To understand the process of money creation today,
let us create a hypothetical system of banks. We will focus on three banks in this system: Acme Bank, Bellville Bank, and Clarkston Bank. Assume that all banks are required to hold reserves equal to 10% of their checkable deposits. The quantity of reserves banks are required to hold is called required reserves. The reserve requirement is expressed as a required reserve ratio; it specifies the ratio of reserves to checkable deposits a bank must maintain. Banks may hold reserves in excess of the required level; such reserves are called excess reserves. Excess reserves plus required reserves equal total reserves. Money Process Creation
BSP is the central depository for the reserves of the
banking system and the major sources of new reserves BSP is responsible for the retirement or disposition of domestic currency BSP is in a unique position to control the supply of money essential in the promotion of economic growth and stability Money Supply Process
The supply of money is defined as the currency
in circulation or the currency held by the non-bank public (C) plus deposit liabilities of commercial banks (D) which include demand deposits (dd), savings deposits (sd), time deposits (td) and deposit substitutes (ds), thus, domestic liquidity is M3 = C + D, where D = dd + sd + td + ds
Assignment Drive SPRING 2015 Program Mba/ Mbads/ Mbaflex/ Mbahcsn3/ Pgdban2 Semester II Subject Code & Name MB0045 Financial Management BK Id B1628 Credits 4 Marks 60