Give a theoretical model of central banking, bringing out the relationship between the monetary base and monetary aggregates. What are instruments of monetary policy used by central banks?

Theoretical Model of Central Banking:

The central bank is the institution responsible for controlling a country's money supply, implementing monetary policy, and maintaining price stability. A theoretical model of central banking involves understanding the relationship between the monetary base and monetary aggregates.

1. Monetary Base (MB): The monetary base consists of currency in circulation (notes and coins held by the public) and reserves held by commercial banks at the central bank. It is also known as high-powered money because it serves as the foundation for the money supply.

2. Monetary Aggregates (M): Monetary aggregates refer to different measures of the money supply within an economy. They include various forms of money such as currency, demand deposits, time deposits, and near money.

Relationship between Monetary Base and Monetary Aggregates:

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