For example, if a country has seven million currencies in circulation among the public, and ten billion currencies in its central bank as commercial banks deposits, then the money base of the country is worth ten point seven billion currencies. The monetary base is the ultimate source of a country’s money supply.

Open market operations are one of the many monetary tools that has direct impact on the money base. In many countries across the world, government bonds are bought and sold in the open markets to keep a measure of control on the country’s monetary base. The implementation of the open market operations method also uses monetary targets like interest rates or exchange rates. Similarly, the monetary base can be expanded using an expansionary policy and contracted using a concretionary policy. Both these policies involve risks and are controlled either by the country’s central bank or the finance ministry.

Money supply is the total amount of money that is available in the economy of a country for making purchases of goods and services and investments purposes. There are many parameters and statistical methods used in measuring the various forms of money in an economy. For example, in the U.S, the Federal Reserve and the country’s central bank has identified the components of the money supply as M1, M2, M3 and L.

M1 is the currency held by the public in various forms such as traveler’s checks, demand deposits, and many different types of accounts such as NOW accounts, Super NOW accounts, ATS accounts and credit union share drafts. The M2 is the currency deposited in various forms in M1 plus the savings and small denomination time deposits. It also includes various other fund shares invested by individual investors; The M3 currency includes all forms of M2 deposits plus large time deposits, investments by institutional investors among others. Finally, the L includes all M3 forms of currency deposits, plus long-term liquid assets, non-bank investments and commercial papers and bankers’ acceptances.

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• Difference Between Monetary Base And Money Supply
• Four Tools That Federal Reserve Use To Increase Money Supply
• How Does The Fed Decrease The Money Supply ?
• Long Run And Short Money Supply
• Money Supply Growth Last Three Months
• Supply Of Money In Relation With Money
• What Are The Components Of The Money Supply ?
• What Happens When The Supply Of Money Increases ?