Monday, May 4, 2009

The monetary Base

Before the individual bank can increase its earning assets, it must first have added cash reserve. If a given bank has not simply increased its cash position at the expense of another bank, total bank reserve or The monetary Base must have grown. The monetary base consists of all bank reserve and all currency held by the public. The public decides how much currency it desire in relation to demand deposits by withdrawing or depositing currency into checking accounts, and banks can determine their demand for excess reserves. Nevertheless, it is the monetary authorities (the central bank and the Treasury) who decide what the total monetary base shall be.
Whenever the Federal Reserve System increases Federal Reserve credit or whenever the Treasury mints more coins or prints more currency, the monetary base increase, If the public is demand for currency is constant, when the monetary base increases, so too do total bank reserve,i.e., Member bank deposits in the federal Reserve Banks and vault cash held by commercial banks. If the banks have more reserve, they can increase the money supply by adding to their portfolio of earning assets. The money supply, However, is increased by a multiple of the increase in bank reserve as determined by the size of the monetary multiplier.

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