What Is the Monetary Base Formula?

The formula for monetary base is MB (monetary base) equals current bank reserves added to liquid currency, or MB = R + C. Liquid currency is the amount of money at hand, and bank reserves are money in the banks.

The monetary base formula, also known as the money base, is designed to measure the amount of money that is currently circulating in an economy. This formula includes the bank reserves in all banks and the liquid currency. Bank currency is the amount of money that people put into banks, in any accounts – this is the amount of money banks can use for making loans and for making money off of (although this interest money is not included in the reserves as it is not actually in the banks). Liquid currency includes all the money that is currently out and about in the economy at any point in time. It is “liquid” because it is easily changeable and can become reserve money be recalled quickly.

The Federal Reserve does not directly control money. However, by influencing the monetary base through the printing of currency, it can change the monetary base supply to change interest rates, including the interest on government loans to banks.