High-powered money (monetary base) consists of:

Question

BlackTom AI · Accepted Answer

High-powered money (the monetary base) equals the sum of currency in circulation plus bank reserves held by commercial banks at the central bank.

1. Relevant knowledge points and concepts
- Monetary base (MB), also called high-powered money, is the central bank’s liabilities that support the broader money supply. 
- Currency in circulation (C) = notes and coins held by the public.
- Bank reserves (R) = vault cash plus deposits that commercial banks hold at the central bank (required reserves + excess reserves).
- The money multiplier links MB to broader money aggregates: Money supply = m × MB.

2. Complete reasoning process step by step
- By definition MB is created when the central bank issues currency or credits commercial banks’ reserve accounts. Those two components are the only elements the central bank directly controls.
- Therefore MB = currency in circulation + reserves held by banks at the central bank.

3. Intermediate (symbolic) steps / formulas
- MB = C + R
- R = required reserves (RR) + excess reserves (ER)
- Broader money example: Money supply (M) = m × MB, where m = (1 + c)/(r + e + c) with c = currency/deposit ratio, r = required reserve ratio, e = excess reserve ratio.

4. Why the correct answer is correct
- Option b, “Currency plus bank reserves,” matches the direct definition MB = C + R. Both components are central bank liabilities and together constitute high-powered money.

5. Why other options are incorrect
- a. “Currency plus demand deposits”: demand deposits are commercial bank liabilities (part of M1), not part of MB. They are created via bank lending, not directly by the central bank.
- c. “Currency only”: omits bank reserves, which are essential MB components.
- d. “Demand deposits plus time deposits”: these are broader money components (M1 and M2) and are not the monetary base.

6. Conclusion
This confirms the correct choice is b. Currency plus bank reserves (option b) is precisely the monetary base (high-powered money).

High-powered money (monetary base) consists of:Single choice

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