Base money is defined as the sum of cash held by the public and reserves held by banks.So base money is all the cash that’s printed by the central bank and is in circulation, and the rest is not in circulation and is held by the central bank.Or does it include the parts that are not in circulation?
Base money is real money, not derivative money, is the bank’s real own capital.Commercial banks can constantly derive money through the deposit-loan-deposit cycle, and the amount of derivative money depends on the reserve ratio.If the reserve ratio is 10%, then $10 can be derived from the formula 10/10%=100 into $100 in a bank account.That’s the secret of how banks can make lots of loans with only a small amount of principal.Base money is the principal of the banking system.
Base money: it is created by the central bank, including the sum of cash in circulation and the reserves of firms. It is the basis and source of bank credit creation. After created by commercial banks, IT can make M (money supply) shrink or expand exponentially, so it is also called high-energy money and strong money.It’s the liabilities of the central bank.The central bank can influence M by adjusting the base currency, thus playing a macro-control role in the social economy.
Advantages:
It’s very predictable, how much base money the central bank is putting into circulation, and it’s easy for the central bank itself to know that information, the data is easy to get, easy to analyze.
The central bank can control the base money in time through its asset business. However, if the central bank increases the base money to make up for the fiscal deficit, it is difficult for the central bank to control the base money by itself.
Strong relevance (to the end goal)
Base money is the basis for the contraction and expansion of money supply M. The change of base money will affect the change of M money supply through multiplier effect, and then affect social and economic activities to achieve the ultimate goal.