TB TF Qu. 04-03 The monetary base is the amount...

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

Question

TB TF Qu. 04-03 The monetary base is the amount...

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

BlackTom AI · Accepted Answer

First, I will restate the prompt and the true/false stance to ensure clarity: the claim is that 'The monetary base is the amount of coin and currency in circulation plus reserves.' and the question is a boolean true/false type.

Option evaluation:
- True: The statement aligns with the standard macroeconomic definition of the monetary base (also called the base money). It comprises the currency outside banks (coins and notes in circulation) plus the reserves that banks hold at the central bank. This definition highlights the components that central banks can influence directly and that underlie the money supply multiplier process.
- Why this is correct conceptually: Currency in circulation represents money that households and firms hold outside of banks. Reserves represent funds that commercial banks keep either as vault cash or as deposits at the central bank. The sum of these two components forms the monetary base, which is the liquidity base that the central bank can affect through policy tools like open-market operations and reserve requirements. Because these two elements exhaust the items under the central bank’s direct control that are not created by bank lending, the statement captures the accepted definition.

To anticipate typical misunderstandings:
- If someone thinks the monetary base includes all money held by the public plus bank deposits, that would be incorrect; broad money (like M2) includes deposits but not the base money directly.
- If someone claims the monetary base is only currency in circulation without reserves, they are omitting the crucial reserve component that banks hold at the central bank, which is essential to monetary policy transmission.
- If someone argues the base includes only reserves and not currency in circulation, they would be omitting the currency held by the public, which is also a key part of the base.

In sum, the statement correctly identifies the monetary base as the sum of coins and currency in circulation outside banks plus bank reserves at the central bank, matching the standard definition.

TB TF Qu. 04-03 The monetary base is the amount... The monetary base is the amount of coin and currency in circulation plus reserves.

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