Monetary Base
Categories: Econ
Think about all the money in the world...the money that’s going from hand-to-firm, firm-to-bank, bank-to-hand, and around and around the money goes.
A monetary base is the amount of a country’s currency that’s “out there” in circulation: in the hands of people and their banks, as well as the bank deposits sitting in the central bank’s reserves. It’s all the liquid cash.
The Federal Reserve, or “the Fed” as the cool kids call it, is the entity that gets to decide how much money is in circulation. If the Fed printed too much money and put it into circulation, that would lead to inflation (or perhaps even hyperinflation).
So how does the Fed increase the monetary base, i.e. the amount of cash floating around, anyway? When it decides it wants to increase the money supply a tad, it’ll make some money and buy bonds from commercial banks. That means commercial banks are holding fewer bonds in exchange for more money, which they’ll lend out, in part (the rest they’ll keep on hand for reserve requirements).