Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Tutoring
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Monetary Base - Explained

What is a Monetary Base?

Written by Jason Gordon

Updated at April 25th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is a Monetary Base?What makes up the Monetary Base?Monetary Base and the Money SupplyManaging Monetary BasesSmaller Scale Monetary Bases and Money SuppliesAcademic Research on Monetary Base

What is a Monetary Base?

The money base of a country refers to the total amount of currency that is in circulation or held in the central banks reserves. It is a term used in economics to describe the quantity of money or currency held in the hands of the public or as commercial bank deposits. The monetary base captures the total banknotes and coins.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

What makes up the Monetary Base?

It is noteworthy to state that the monetary base only captures the most liquid currencies of a country, that is, the total amount of money (banknotes and coins) that are available for immediate use. While some of these banknotes and coins are in general circulation held by the public, some are held in the central banks reserves as bank deposits. The monetary base of a country can expand from time to time, given that the Federal Reserve can produce additional currency for public circulation or create new funds for bond purchases.

Monetary Base and the Money Supply

While the monetary base only accounts for the most liquid form of a countrys currency such as banknotes and coins, money supply captures a broader perspective. The money supply represents the totality of a countrys monetary base, including other assets in its less liquid forms. To adequately capture the variety of assets, the money supply is categorized into M0, M1, M2, M3 or M4. The total amount of funds in the monetary base is reported under the lower levels of the money supply. Hence, the distinguishing factor between the monetary base of a country and the money supply is that while the former accounts for the most liquid assets available for immediate use in a country, the latter accounts for the totality of a countrys assets, including the less liquid ones.

Managing Monetary Bases

The monetary base of every country is managed or overseen by the country's central bank. The central bank has the duty to expand (increase) or contract (reduce) the monetary base given the peculiarities of the present economic situation. Through adequate monetary policies, the central bank effectively manages the monetary base. In many countries, the open market operations through which the government buys and sells bonds can be used to maintain the desired level of the monetary base.

Smaller Scale Monetary Bases and Money Supplies

The monetary base in its broadest perspective captures the entirety of currency available for immediate use in an economy, this includes banknotes and coins and commercial bank deposits held in central bank's reserves. The money supply captures all the assets, both liquid and less liquid assets owned by a country. The smaller scale of the monetary base applies to the household. It captures the total amount of money (banknotes and coins) in the possession of a particular household. Funds held in deposit accounts are also included in the monetary base. The money supply of a household on the other hand, includes available credit, unused lines of credits and other funds not physically held by the household.

Related Topics

  • Money Supply
  • M1 and M2 Money Supply
  • Monetary Base
  • Savings, Demand, and Time Deposits
  • Money Capital Market
  • Quantity Theory of Money
  • Aggregate Expenditure Model
  • IS-LM Model
  • European Capital Market Institute



monetary base

Was this article helpful?

Yes
No

Related Articles

  • Diner's Dilemma - Explained
  • Trade War - Explained
  • Rational Expectations Theory - Explained
  • True Cost Economics - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand