Question

True or false and explain why

The supply of money can never be equal to the monetary base?

Answer 1

Answer.) False

Remember that

Money supply = money multiplier (m) × monetary base

Monetary base = currency + reserves

Money multiplier ( m) = {(cr + 1)/(cr+rr)}

Where cr = cash reserve ratio and rr = required reserve ratio

Money supply can be equal to monetary base only if required reserve ratio is equal to 1.

Now, if required reserve ratio is 1 then money multiplier will also be equal to 1.

Therefore, in that case, money supply will be equal to monetary base.