Final answer:
The monetary base includes A. Currency held by the public and commercial bank reserves held with the central bank. It is more liquid and a smaller subset of M1 and M2, emphasizing currency in circulation and reserves that fulfill reserve requirements. The monetary base is fundamental to the central bank's monetary policy conduct.
Step-by-step explanation:
The correct option for what is included in the monetary base is A. Currency held by the public and commercial bank reserves held with the central bank. The monetary base encompasses all the physical money in circulation within the economy as well as the balances held by commercial banks at the central bank. This figure is crucial because it represents the most liquid portion of the money supply and is foundational for banks to create more money through the fractional-reserve banking system.
The M1 money supply, which consists of coins, currency in circulation, and checking account balances, is a broader measure of the money supply than the monetary base. It includes all money that can be quickly and easily accessed for transactions. M1 differs from the monetary base because it includes checking deposits (demand deposits) but does not take into account the reserves held by commercial banks at the central bank.
M2 money supply includes all of M1 plus additional assets that are less liquid, such as savings deposits, time deposits like certificates of deposit, and money market funds. Because these assets are not as readily available for spending and transactions as currency or checking deposits, they are not part of the monetary base.
Thus, the monetary base is a smaller, more liquid subset of the M1 and M2 definitions of money, focused specifically on currency and reserves that can be used to meet the demand for money or to address reserve requirements set by the central bank. The monetary base is a critical component in the conduct of monetary policy because it is directly influenced by decisions made by the central bank.