Monetary base is the total amount on which the liquid currencies circulate in the hands of the public. The deposits in the financial institutions and the deposits which are of the commercial bank are in the central bank of the respective country.

If the country has seven million currencies among the public and ten billion in the central bank as commercial bank deposits then the money base of the country will be ten point seven billion currencies. This is the monetary base which is the ultimate source of a country’s money supply. Open market operations have direct impact on the money base as they are included in one of the many monetary tools. In order to keep the measure of control on the country’s monetary base government;s bonds are bought and sold in the open markets. This implementation of the open market also uses the method of monetary targets like interest rates or exchange rates. the monetary base can also be expanded using an expansionary policy and can also be contracted by using a concretion policy. Both have risks involved in them and both are controlled by the country’s central bank or the finance ministry.

Money supply is that amount which is available in the economy of the country and is used for the purchases of goods and services and for other investment purposes. Money in the economy can be measured in many ways. It can be measured by parameters or statistical methods.

In the US, the federal reserves and the country’s central bank has been successful in identifying the components of the money supply at M1, M2, M3 and L.

M1 is that currency which is held by the country’s public for the use of various things like travelers check, demand deposits and also many other different types of accounts like NOW accounts, super NOW accounts, credit union drafts and ATS accounts.

Where as the M2 is the currency which is deposited in M1 including the small and savings denomination time deposits. M2 also includes many other fund shares which are invested by many other individual investors who wish to invest their money.

Just like M2 currency includes M1, the same way M3 currency also includes M2 deposits including the large time deposits, investments which are done by the large time deposits and the investment which is done by other institutional investors in the country.

L, which is also one of the components of the money includes all M3 forms of currency deposits, long term liquid assets, non-bank investments and commercial papers along with bankers acceptance.

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