A Model of the Money Supply

A Model of the Money Supply

Let’s now examine in greater detail what determines the money
supply.
To do this let’s go back to the definition of money supply.
Money Supply:
M = C + D

The monetary base (H or high powered money) comprises
of notes and coins held by the public (C) and banks reserves
(R – this refers to only the required reserves). C as we know is part
of the money supply.

The monetary base is therefore:
H = C + R
It is the narrowest definition of money supply, consisting of the
most liquid forms of money.

The central bank has direct control over H but not over M.