6.6 Introducing the central bank

base money is a liability of

the central bank

what is base money composed of

currency and reserves

reserves / reserve accounts

deposits of banks w/ the central bank

**only banks can have these accounts and only rserves can be used to settle transactions w/ other banks

how does the central bank supply reserves

by buying assets from banks or by directly lending to them

components of modern money

currency and bank money

**bank money makes up a way larger proportion of

how is the money supply measured by central banks?

currency + bank deposits (bank money)

**each central bank has diff definitions of the money supply that ituses

legal tender

means that it can be used as a means of exchange for buying G+S

currency is a legal tender —> this means anyone who is selling something is obliged by law to eccept it, whereas they could refuse to accept a phone or debit card payment

banknotes are part of this as well

what do banknotes tell us

you can use banknotes to pay off a debt but once you do, the central bank actually owes them money

therefore banknotes are a liability of the central bank

when they’re used, central bank’s liability is just transferred from one person to another —> bc it’s a liability of the central bank, it’s base money and not BANK money

bank money vs. banknotes (base money)

bank money = liability of commercial banks

banknotes = liability of central bank

debt depends on trust - what happens when there’s less trust

it’s more expensive to borrow or not possible to borrow at all unless the borrower provides collateral

why do we refer to base money as part of monetary policy?

bc the more successful the CB is at stabilizing inflation, the more reliable its liability is as a real store of value