High-powered money, also known as base money or reserve money, consists of currency held by the public and bank reserves. It is the monetary base from which the money supply is created through the banking system's multiplier effect. It does not earn interest and is not affected by the Fed's open market operations, such as the sale of government bonds.

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High-Powered Money

Question 18

Multiple Choice

High-powered money

A) earns more interest than other forms of money
B) consists of currency held by the public and bank reserves
C) consists of currency held by the public and demand deposits at banks
D) includes time and demand deposits held at banks
E) is created whenever the Fed sells government bonds

Correct Answer: