High-Powered Money: The Foundation of Monetary Supply

What constitutes high-powered money?

Answer:

High-powered money amounts to bank reserves combined with currency held by the nonbank public. Bank reserves include both required and excess reserves.

High-powered money, also known as the monetary base, is typically referred to as the sum of the currency in circulation and the reserves held by banks. Currency in circulation refers to the physical forms of money used by the public, excluding the banks. On the other hand, reserves represent the deposits that banks hold with the central bank such as the Federal Reserve and the cash in their vaults ready for immediate withdrawals.

The reserves can be categorized into two types:

1. Required reserves: This represents the minimum amount of reserves that a bank is mandated to hold against its deposits based on the reserve requirement set by the central bank.

2. Excess reserves: This is any additional reserves that a bank chooses to keep above and beyond the required level.

Therefore, high-powered money consists of bank reserves plus currency held by the nonbank public.