Monetary Base

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21 Aug, 2024

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Table Of Contents

What is a Monetary Base?

The monetary base refers to a measure of money supply in the economy consisting of Federal Reserve System (Central Bank) issued currency circulating outside of Treasury and Federal Reserve through the public and Federal Reserve balances of depository institutions. It is also known as MB or M0.

A major portion of MB accounts for the money a country's citizens use in their everyday lives. As a result, it throws insight into a nation's nominal GDP, the price level in the economy or the level of inflation, short term or long-term economic directions. Hence it acts as a guideline or reference for monetary policy determination.

What is a Monetary Base?

The monetary base consists of currency in circulation outside of Treasury and Federal Reserve and the Federal Reserve (Central Bank) balances of depository institutions.
It is a measure of money supply and is also known as MB, M0, or base money. Other measures of money supply are M1 and M2.
It throws insight into a nation's nominal GDP, the price level in the economy or the level of inflation, short term or long-term economic directions.
According to the data listed on the Federal Reserve website, the United States MB value of December 2021 is 6,413.2 (Billions of Dollars), and January 2022 is 6,103.5 (Billions of Dollars).

Monetary Base Explained

The monetary base definition illustrates an important concept in monetary economics. Every country has a central bank that formulates, controls, and manages currency circulation. For example, the Federal Reserve in the United States central bank is responsible for the US monetary base.

Central banks control the MB by applying common monetary policy tools or open market operations. For example, when Federal Reserve engages in selling and buying US Treasury Bonds, the MB value of the US changes. By purchasing government bonds as open market operations. Another example is that when it comes time to reduce the MB, the Fed might stop the lending programs. For implementing monetary policy, a country's monetary policymakers must study money supply indicators, including MB specifics, even though these aspects are only a subset of the vast array of financial and economic data that policymakers examine.

MB reflecting an important portion of a nation's money supply is also indicated as MO. In some instances, it is also called M0, money base, or base money. Other measures of money supply are M1 and M2. M1 is the total currency held by the public and transaction deposits at depository institutions. M2 is the sum of M1, savings deposits, small-denomination time deposits, and retail, money market, mutual fund, shares.

Monetary Base Formula

The MB in numerical terms is expressed as the sum of the total value of the currency in circulation and reserve balances.

MB indicates the monetary base in the above formula, C is the currency in circulation, and R is the reserve balances. Reserve balances are the total deposits of all kinds of depository institutions in their accounts at the Federal Reserve or the nation's central bank. These are the basic input values required for MB calculation, even as the input for Monetary base calculators.

Example

The following is a simple example for a better understanding of the concept and formula usage.

A country has $300 million currency in circulation, and its central bank holds $70 million as deposits from banks and other depository institutions. In total, the country's MB is $370 million. The calculation is as follows:

MB = C + R

MB = $300 million + $70 million = $370 million.

In a real-world scenario, let's look into the U.S. monetary base.

According to the data listed on the Federal Reserve website, the MB values of December 2021 and January 2022 are as follows:

MB = C + R

December 2021: MB = 2,225.3+ 4,187.9= 6,413.2 (Billions of Dollars)

January 2022: MB = 2,232.9+ 3,870.5= 6,103.5 (Billions of Dollars)

Monetary Base vs Money Supply

When the MB encompasses currency in circulation and reserve balances, money supply indicates the total currency in circulation and checkable or demand deposits. Reserve balances are not included in the money supply calculation, and it is evident that the money supply concept aligns with the money available for immediate use.

Frequently Asked Questions (FAQs)

What is the monetary base definition?

The monetary base is the total amount of money that can be seen circulating among the public and deposits of depository institutions in the central bank's reserves of the nation. Generally, a country's central bank, like the federal reserve, is entitled to manage the MB value. They use monetary policies and open market operations to maintain the intended level of MB.

What is the monetary base formula?

The formula for MB is:
MB = C + R
Where C is the total value of the currency in circulation and R is the reserve balances.

What is the difference between the monetary base and the money supply?

MB is the total value of the currency in circulation and reserve balances, whereas the money supply refers to the quantity of currency in circulation and checkable or demand deposits. The difference evident from its formula is that reserve balances are not included in the money supply calculation, showing that the money supply concept is more about the money available for immediate use.