The smallest and most liquid measure, M0, is strictly currency in circulation and money being kept by banks in reserves; hence, M0 is often referred to as the “monetary base.” M1 is defined as all of M0 plus the remaining demand deposits not in reserves as well as traveler’s checks.
Monetary base equals currency in circulation plus reserve balances.
Who controls the monetary base?
While the Fed’s control over the size of the monetary base is complete, its control over the money supply is not. One major reason for this is banks can choose to hold the additional base money (i.e., deposit balances with the Federal Reserve banks) supplied by the Fed as excess reserves.
What does the monetary base do?
The monetary base refers to the amount of cash circulating in the economy. It is composed of two parts: currency in circulation and bank reserves. Currency in circulation refers to banknotes and coins held by the public – money we use in our everyday lives.
What are M1 and M2 and monetary base?
- The Relationship between M1 and M2 Money. M1 and M2 money have several definitions, ranging from narrow to broad. M1 = coins and currency in circulation + checkable (demand) deposit + traveler’s checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.