Economics Part A

Understanding The Monetary Base

Monetary base is a simple but important term: 

The monetary base = The total value of all currency in circulation

Generally, currency can be found partly in the hands of the public, and partly in the vaults of the banks.

If the public deposits all of its money into bank accounts, then all of the currency is in the bank vaults.

If the public decides to keep all of its money in cash, then there is nothing in the bank vaults.

The situation can be defined with an equation:


Monetary Base = Currency in the hands of the public + Currency in bank vaults

Understanding The Monetary Base552Understanding The Monetary Base