Final answer:
The monetary base consists of currency in circulation and reserves in bank. The Fed has tighter control over bank reserves which they manage using various monetary policy tools to control the economy's liquidity and money supply.
Step-by-step explanation:
The two components of the monetary base are currency in circulation and bank reserves with the central bank. The Federal Reserve, also known as the Fed, can control these two aspects to influence the money supply.
Currency consists of the notes and coins held by the public. Bank reserves are the deposits that banks maintain at the Fed to meet regulatory requirements and to clear transactions. Of these two components, the Fed has more direct control over bank reserves, mainly through open market operations and the setting of reserve requirements.
The Federal Reserve uses monetary policy to manage liquidity and control the amount of money in the economy. They do this by adjusting the monetary base, using tools such as open market operations, changing the discount rate, and setting reserve requirements. This in turn affects interest rates and the broader financial conditions in the economy.