High-Powered Money

Categories: Trading, Managed Funds

High-powered money, also known as the “monetary base,” is the total amount of money the public...and Federal Reserve Banks...have.

Basically, all the money.

So what makes money “high-powered,” you ask? What’s it’s superpower...besides being able to buy just about anything?

The Federal Reserve controls the money supply by setting monetary policy, as central banks are wont to do. Money that flows from the coffers of the Fed and into the public and Reserve Banks is high-powered because of the money multiplier effect.

High-powered money ripples through the economy, like it's been given a big ol' shot of espresso.

When money is pumped into the banking system and out into the public, the act of lending and borrowing kind of “creates” new money through a ripple effect. For instance, a bank lends you money, which you take and spend elsewhere...say, at the deli, and on rent. Then your landlord and the deli-dude takes that money you paid them to pay for their rent and their lunch, and so on and so on.

Meanwhile, the bank is still getting paid back. Is that money high-powered? We’d say so. Time for some coffee.

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Econ: What is an Economic Multiplier?3 Views

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and finance Allah shmoop What is an economic multiplier All

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right people To understand how injections of investments in cash

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affect the economy macroeconomist often turned to the keen Zeon

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idea of the economic multiplier Every time you spend a

00:19

dollar well that dollar eventually becomes someone else's income Likewise

00:24

every dollar you get was once someone else's income that

00:28

they spent The more we all spend in dollars while

00:32

the more dollars we all have to spend every time

00:35

Dollars which hands While that's a ching that stimulates even

00:38

Mohr Chuck Ching's in the economy this money going around

00:41

around as referred to as the circular flow of income

00:45

and in theory more spending and investment leads to even

00:49

more spending and investments It's kind of a domino effect

00:52

which ripples outward into the entire economy boosting output GDP

00:56

and employment well The economic multiplier measures how a change

01:00

in aggregate demand affects nationwide output Usually GDP like that's

01:05

the big measure through the ripple effect of the circular

01:08

flow of income Well as demands for goods services and

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investments rise more money is flowing through the pipes of

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the economy raising GDP and increasing economic growth Yeah Ching

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city When demand for goods services and investments fall the

01:21

reduction in money flowing through the pipes contracts the economy

01:24

making GDP slow down to a trickle or even go

01:27

negative Sometimes when the economy slows down the Fed a

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k a The Federal Reserve or the U S Central

01:32

bank may decide to lower interest rates Lowering interest rates

01:36

means things like business loans car loans credit cards stuff

01:40

mortgages and other types of debt are then cheaper in

01:43

theory encouraging consumers to borrow more Lowering interest rates the

01:47

equivalent of the Fed putting debt on sale which draws

01:50

in investors and spenders who then use that money spurring

01:53

more spending hopefully from their spending raising interest rates has

01:57

the opposite effect Reducing the demand for investing been spending

02:00

since is more expensive than to rent money Well for

02:03

instance let's say the Fed lowers interest rates Around the

02:05

same time Farmer Frannie was thinking about expanding her chicken

02:09

business Farmer Franny decides that taking out the loan is

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worth it since she only has to pay one point

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five percent interest on it Farmer Franey then uses her

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loan to build Mohr chicken coops increasing the income of

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the local farm outlet store and making room for Mohr

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chickens to be grown and more eggs and more feathers

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for beds Well some of those eggs turn into chickens

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and some chickens have more eggs and to say which

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came first Well farmer friend he's selling chickens and eggs

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left and right and she easily pays off her really

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inexpensive loan Now friend he has more money than she

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would have had before which she then spends Will those

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dollars travel and become other people's incomes creating Mohr economic

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growth Eventually Farmer Frannie's farming business is doing well enough

02:52

that she takes out a loan to expand her farm

02:54

even further buying up the latest in farming equipment and

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hiring more workers Tio take care of the whole thing

03:01

Well Farmer for any second loan puts money in the

03:03

pocket of the landowners she bought The land from right

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also spends money on the companies selling to her the

03:09

new farm equipment and the incomes of her new employer

03:12

That money keeps branching outward into the economy Is it

03:15

continues this circular ripple effect like a pebble in a

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pond to be spent turning into someone else's paycheck or

03:21

business investment And of course the money will only continue

03:24

to ripple outward if people keep spending it well Factors

03:27

like taxes consumer confidence in the economy and government spending

03:31

can determine how strong those ripples are how strong that

03:35

economic multiplier is at any given time for instance consumers

03:39

also have varying propensities to consume and safe depending on

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how much well they're paying Tax high taxes might make

03:46

people buy less usually does just because taxes cut into

03:49

their buying power which would lower the economic multiplier Right

03:53

Well don't get too excited about all this The economic

03:55

multiplier isn't necessarily a good argument for the reason your

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tax bill should be lower If taxes air low making

04:02

government revenue low well then the government may find itself

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borrowing money from abroad And all that can cause interest

04:07

rates to rise over time reducing demand for investment and

04:11

spending in reducing the economic multiply right well another important

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factor that affects the economic multiplier imports Yeah imports The

04:18

more money that's being spent in foreign markets will the

04:21

more that's leaking out of our national income producing our

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economic multiplier of the home country U S A U

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s A and our GDP when there's a change in

04:32

taxes or interest rates or confidence in the economy Well

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the multiplication effects kind of lesson all right But in

04:38

the long run economists expect things like reduced interest rates

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tax cuts stimulus packages and renewed confidence in the economy

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to have positive multiplier effect OK now get out there

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and spend knowing that every dollar you spend is contributing

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to someone else's income in the short run and the

04:53

economic multiplier in the long run Yeah way to be 00:04:55.887 --> [endTime] a team player by that portion

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