Chapter 5R, Problem 17MCQ

To determine

The correct option that defines the part of the money supply but not the part of the monetary base.

Answer to Problem 17MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

  

Monetary base is the sum of the circulation of currency and the bank’s reserve. Money supply is comprised of checkable deposits and circulating currency. Circulating currency is also part of the monetary base but checkable deposits are not. Therefore, option a is correct.

Explanation for incorrect options:

b.

Reserve ratio is represented by rr. The money supply does not include bank reserve as it cannot be used for investing or lending purposes. Therefore, option b is incorrect.

c.

Currency in circulation is the part of money supply and monetary base both. Therefore, option c is incorrect.

d.

Deposits at the fed are not allowed to be supplied instead it is kept by the fed for security reasons. Therefore, option d is incorrect.

e.

Saving accounts are the type of accounts held by banks. The amount deposited in saving accounts can be circulated through lending or investing. Therefore, option e is incorrect.

Economics Concept Introduction

Monetary base: It is the sum of circulating currency and the reserves in the bank.

Required reserve ratio: Required reserve ratio refers to the portion of the total money deposits that are collected by the banks. This amount cannot be used for further lending or investing purposes. The percentage is decided by the Federal Reserve.