Question

1)What is monetary base (MB)?
2) How to calculate monetary base in economics?
3) Explain two ways by which the Central bank can increase the monetary base (MB).
4) Why is the effect of Central bank actions on bank reserves less exact than the effect on the monetary base?

Answer 1

1.) Monetary base is sum total of money in circulation and reserves held with banks. Monetary base is different from money supply as money supply informs us about total money in circulation in the economy.

2.) Monetary Base = Total currency circulation (C) + Reserves with banks (R)

3.) A - Modify Reserve requirements (Monetary Policy) - The Central Bank can modify the precentage of reserves to be kept by the banks against the deposits so as that banks have more or less money depending on the percentage to lend loans to customers hence increase or decrease money supply

B - Open market operations - buying or selling of government bonds to increase decrease monetary base and money supply

4.) Central bank's effects of bank reserves prove to be just a strategy to increase or decrease the monetary base