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.