What does the monetary base consist of?

The monetary base, often referred to as high-powered money, is comprised of two main components: currency in circulation and reserves held by banks at the central bank. Currency in the hands of the public includes all physical cash that individuals and businesses use for transactions. Reserves are the funds that banks are required to hold, either in their vaults or on deposit with the central bank, which are not available for lending out.

This definition highlights that the monetary base reflects the total amount of a country's currency that is available in the economy, which involves both the currency issued by the central bank that is accessible to the public and the reserves maintained by financial institutions. Understanding the composition of the monetary base is crucial because it plays a vital role in central banking operations, monetary policy formulation, and influences the overall money supply in the economy.

The other options suggest incorrect groupings or definitions that do not accurately represent the components of the monetary base. For instance, referring to M1 or M2, which include various types of deposits and are broader measures of the money supply, does not align with the narrow definition that specifically focuses on currency and reserves.