Monetary Base and Money Supply
Monetary base can be referred to as the total currency circulating in public or bank deposits in the central bank. It relates mostly to coinage, notes and current commercial banks deposit hence its component of a state money supply. As a result of the creation of new funds from nations to buy bonds from banks, it enables them to increase holdings resulting expand in the monetary base. On the other hand, money supply can be referred to as the cash circulating in an economy since it contains printed notes, currency, cash in the deposit account and other liquid assets.
Analysis and Valuation of Money Supply
Analysis and valuation of money supply make it easy for economists and policymakers to frame or alter policies. Valuation of the money supply is known to affect business cycle hence affecting the national economy. Money supply includes assets which are at times less liquid and divided into levels depending on the system (Durlauf 64). Each system is seen to represent a facet of country assets. On the other hand, monetary base funds are held in lower levels such as M1 or M2 which comprises of money circulating and specified liquid assets (Durlauf 72). A nation's central Bank usually controls monetary base and can be controlled by a nation through selling and buying of government bond.
Influence of the Federal Reserve on the Monetary Base
The Fed affects the monetary base since it has substantial influence and is the crucial determinant in the amount of circulation in the reserves. It affects the money base by controlling all the three components of the monetary base (Brandl 218). This includes the currency circulating, the vault cash, and the Federal Reserve deposits. The currency circulating comprises of metal coins and Paper bills circulating in the economy. These can be used to make payment, purchase goods, and complete transactions. Vault cash includes metal coins and paper bills in the bank vault and is mostly used to cash checks or withdrawal of money by the depositors. However, the cash in the bank vault is not money supply since it is not circulating. Federal Reserve deposits, on the other hand, are the deposits kept by the Bank (Cochrane 80). They assist in bank activities (loans and deposit) and clearing of checks in the banking system. It also controls the printing of paper bills which is the primary component of vault cash and currency in circulation. Since the Fed has the control over deposits, it can change the amount of Fed deposit in the commercial banks this can be achieved by buying and selling of Treasury securities.
Influence of the 1929-1933 Crisis on Money Supply
The money supply in the U.S occurred during the 1929-1933 crisis. Since the deposit flows were anticipated, the crisis resulted in making the public fear for their deposits and this, in a way, resulted in an increase in the bank holdings and the currency ratio. Both changes resulted in a reduction of the money multiplier as well as the money supply (Durlauf 104). In this case, an increase in the currency and excess reserve resulted in a fall in the multiplier, hence making the money supply to fall.
Rise in Unemployment and Decline in Money Supply
To sum up, Fed requires bank deposit and financial institutions to reserve some specified deposit liabilities. A rise in unemployment has led to a decline in the money supply, and this has resulted in a fall in money quality. Price inflation, which was accompanied by an increase in the money supply growth rate, this acceleration of growth of money in excess produced inflation.
Works Cited
Brandl, Michael W. Money, Banking, Financial Markets " Institutions. Cengage Learning, 2017.
Cochrane, John. "Monetary Policy with Interest on Reserves." Journal of Economics Dynamics and Control, vol. 49, 2014, pp. 74-108.
Durlauf, Steven N. Monetary Economics. Palgrave Macmillan, 2010.
