High-powered money

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High-powered money is a macroeconomic term referring to the monetary base — that is, to highly liquid money and includes currency and vault cash. In the United States, with the beginning of the Federal Reserve System in 1913, high-powered money also includes deposit liabilities of the Federal Reserve System to banks. ^[1]

The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually either the finance ministry or the central bank. These institutions print currency and release it into the economy, or withdraw it from the economy, through open market transactions (i.e., the buying and selling of government bonds). These institutions also typically have the ability to influence banking activities by manipulating interest rates and changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers).

The monetary base is called high-powered because the magnitude of changes in monetary base can be greatly magnified by the money multiplier. That is, a small change in the monetary base can result in a large change in the overall money supply. As an example, a $1 billion increase in monetary base will lead to an increase of many more billions in the money supply because of money multiplier effects of the fractional reserve ratio.

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[edit] External links

• The Great Contraction - A Monetary History of the United States, 1867-1960 By Milton Friedman, Anna Jacobson Schwartz