Derive a relationship between the monetary base and monetary aggregate.

Derive a relationship between the monetary base and monetary aggregate. 

Ans. Fore deriving relationship between monetary base and monetary aggregate, we need to take some assumptions. Let Monetary base (MB) = C + D To understand the impact of monetary aggregates on monetary base, let us take some assumptions. First, let us assume that private agents like to hold cash and bank deposits in some strict proportion. C/D = c Where, c is assumed to be constant. It implies people hold a constant proportion of deposits as cash. Secondly, we assume that banks keep a fixed proportion of their deposits as cash reserves with them. R/D = r r is determined by RBI in a Indian Economy. From these we can say that: MB = R + C in equilibrium M = C + D This leads to an equation M = [(1 + c) /(c + r)] MB = mMB [(1 + c) /(c + r)] is known as money multiplier. It shows the rate at which money in circulation will multiply