Narrow definition of money: M1 includes currency and demand deposits.
1. Currency (coins + paper money) held by public.
a. All coins are token money, which means its intrinsic value is less than the face value of the coin. The metal in a 50 paisa is worth less than 50 paisa itself. b. All paper currency consists of Bangladesh bank Notes issued by the Bangladesh Bank. 2. Demand deposits are included in M1, since they can be spent almost as readily as currency and can easily be changed into currency. a. Chartered banks are a main source of demand deposits for households and businesses. B. Money Definition: M2 = M1 + personal saving deposits and non-personal notice deposits at chartered banks. C. Money Definition: M2+ = M2 + deposits at trust and mortgage loans companies, deposits at and credit unions, plus money market mutual funds, and at other non-bank deposit taking institutions. Monetary base Monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. The monetary base is highly liquid money that consists of coins, paper money (both as bank vault cash and as currency circulating in the public), and commercial banks' reserves with the central bank. The monetary base is also called high-powered because an increase in the monetary base can result in a much larger increase in the supply of bank money, an effect often referred to as the money multiplier. An increase of 1 billion currency units in the monetary base will allow (and often be correlated to) an increase of several billion units of "bank money". Factors affecting the monetary base: Factor
Effect on Monetary Base
Open Market Purchase
Open Market Sale Increase in discount window borrowing Increase in the discount rate A Monetary Injection
Effect on Money Supply
Influencing the Quantity of Money
A. How Required Reserve Ratios Work 1. If the BB increases the required reserve ratio, the banks must increase their reserves and decrease their lending, which decreases the quantity of money. 2. If the BB decreases the required reserve ratio, the banks can decrease their reserves and increase their lending, which increases the quantity of money. B. How the Call Money Rate Works 1. When the rate increases, banks are less willing to borrow reserves, so they decrease their lending and the quantity of money decreases. 2. When the rate decreases, banks are more willing to borrow reserves, so they increase their lending and the quantity of money increases. 3. Changes in the call money rate have limited effect on the quantity of money because banks rarely borrow from the BB. C. How an Open Market Operation Works Open market operations are the BBs major policy tool. When the Bangladesh Bank buys securities in an open market operation, it pays for them with newly created bank reserves and money. 1. The BB Buys Securities a. When the Bangladesh Bank buys securities from banks it does so by increasing the banks reserves. This action increases the monetary base and increases the reserves of the banking system. b. When the BB buys securities from the nonbank public, the seller deposits the check received from the BB in a bank, whose reserves now increase by the amount of the check.