ABSTRACT
This chapter focuses on the monetary aggregates that are commonly used by central banks to measure liquidity levels in their financial systems. It explains how money is created by financial institutions, such as banks, and the role a nation's monetary base and money multiplier play in creating money. Central banks use the one that has proven to have the closest correlation to their goals, such as low and steady inflation, full employment, and/or targeted exchange rate levels. Money supply definitions are organic in the sense they change when novel financial instruments are introduced and substantially affect spending and financial investment patterns or decisions. A central bank's main responsibility is keeping inflation under control. Many countries and currency unions insulate their central banks from government intervention and political pressures by legislating their independence. Monetary base is the raw material from which a banking system creates money. Central banks do not have exclusive control over the money multiplier.
