The monetary base is the amount of coin and currency in circulation plus reserves.

Question

BlackTom AI · Accepted Answer

The statement asks whether the monetary base equals the sum of coin and currency in circulation plus reserves.
First, recall that the monetary base (also called the base money or high-powered money) is defined as the totalamount of currency currently in circulation outside the central bank plus the reserves held by the banking system at the central bank.
Option: If we decompose the terms, 'coin and currency in circulation' accounts for the physical money held by the public and non-bank entities, while 'reserves' refer to the deposits that commercial banks keep at the central bank (and any vault cash held by banks as part of those reserves).
Therefore, combining these two components—currency in circulation outside the central bank and reserves at the central bank—gives the monetary base.
There are common misconceptions: some people think the monetary base includes all bank deposits or broader money aggregates (like M1 or M2), but those are broader money measures and not the base money; the base money is narrower, focusing on currency in circulation plus bank reserves.
In summary, the statement correctly defines the monetary base as coin and currency in circulation plus reserves, so it is true.

The monetary base is the amount of coin and currency in circulation plus reserves.

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