High powered money comprises of:a)Notes and coins in circulation with Public and Vault cash of Commercial Banks and deposits held by Government and Commercial Banks with RBI.b)Notes and coins in circulation with Public and deposits held by Government.c)Currency and deposits held by bank with RBI.d)Notes and Vault cash of Comm ercial Banks.Correct answer is option 'A'. Can you explain this answer?

Question

Answer

The total liability of the monetary authority of the country, RBI, is called high powered money.
It consists of currency in circulation with public, vault cash of commercial banks and deposits held by the government and commercial banks with RBI

Answer

High powered money, also known as monetary base or monetary aggregates, refers to the total amount of money that is issued by the central bank of a country. It is the foundation of a country's money supply and plays a crucial role in the functioning of the economy.

The correct answer, option 'A', states that high powered money comprises of notes and coins in circulation with the public, vault cash of commercial banks, and deposits held by both government and commercial banks with the Reserve Bank of India (RBI). Let's break down each component:

1. Notes and coins in circulation with the public: This refers to the physical currency, such as banknotes and coins, that is in circulation among the general public. These are the tangible forms of money that individuals and businesses use for transactions.

2. Vault cash of commercial banks: Commercial banks hold a certain amount of cash in their vaults to meet the demands of their customers for cash withdrawals. This cash held by commercial banks is considered part of the high powered money as it is readily available for use.

3. Deposits held by government and commercial banks with the RBI: The Reserve Bank of India is the central bank of the country and acts as a banker to both the government and commercial banks. Both the government and commercial banks hold deposits with the RBI for various purposes. These deposits are also included in the high powered money as they represent funds that are readily available for use.

Together, these components form the high powered money or monetary base. This money serves as the foundation for the creation of the broader money supply in the economy through the fractional reserve banking system. Commercial banks use a portion of the high powered money to make loans and create additional money through the process of credit creation.

In summary, high powered money consists of the physical currency in circulation with the public, the cash held by commercial banks, and the deposits held by both government and commercial banks with the central bank. These components collectively form the core of the money supply and play a crucial role in the functioning of the economy.

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