Explain about monetary base, Macroeconomics

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Q. Explain about Monetary base?

Monetary base is defined as the total value of all currency (coins andbanknotes) outside the central bank and commercial banks' (net) reserves with central bank. Monetary base is a debt in the balance sheet of central bank. Its assets are mainly comprised of the foreign exchange and gold reserves and bonds issued by national government. Currency inside central bank has no value - it's comparable to an "I owe you" written by yourself and held by yourself.  

Because the central bank has a monopoly on issuing currency, it's in complete control of the monetary base. Though central bank doesn't completely control the money supply. This is because of the second component of the money supply - bank deposits - that it can't control. Providentially, it has methods of influencing the total money supply.

In many nations, central bank imposes reserve requirements. This means that commercial banks are obliged to hold a specific percentage of deposits as reserves either as currency in their vaults or as a deposit at central bank. Reserve requirements are generally slightly small (typically between 0% and 10%) that means the monetary base is quite close to the value of all currency outside the central bank.


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