Monetary Base (M0 or MB)

Definition

The monetary base, also known as M0 or MB, refers to the total amount of money in an economy that is held by the central bank. It includes physical currency (coins and notes) in circulation and reserves held by commercial banks.

Analogy

Think of the monetary base as the "money foundation" of an economy. Just like a building needs a strong foundation to support its structure, an economy needs a solid monetary base to support its financial system.

Related terms

Currency in Circulation: This term refers to the total amount of physical currency (coins and notes) that is in the hands of individuals and businesses within an economy.

Reserves: Reserves are funds held by commercial banks at the central bank. These reserves serve as a cushion for banks to meet their obligations and maintain stability.

Central Bank: The central bank is responsible for controlling and managing a country's money supply, interest rates, and overall financial system. It acts as the banker for commercial banks and implements monetary policy.