Glossary term
High Powered Money: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
High powered money, also called the monetary base or reserve money, is the money issued by the central bank that serves as the base for the money supply. It consists of currency held by the public, banks’ cash reserves with the Reserve Bank of India and some other deposits with it.
In more detail
The name comes from the power of this money to support a much larger stock of deposits. Each rupee of reserves lets banks lend several times over. The central bank controls high powered money directly, so it is a lever for influencing the money supply: buying securities adds to it and selling securities withdraws it.
Example
If high powered money is ₹20 lakh crore and the money multiplier is 4, the money supply can reach about ₹80 lakh crore.
Key points
- Money supply = money multiplier × high powered money.
- It is the RBI’s liability.
- Open market operations and the CRR change it or its effect.
Common mistake
Counting only currency in circulation as high powered money.
Related terms
Money multiplierCash reserve ratio
Where it is explained
This term is explained in Class 12 Macroeconomics Chapter 3: Money and Banking.