<p>The instruments in M0 are part of any monetary aggregate.</p>

<p>Does the act of adding to M0 lower the money supply? It depends.</p>

<p>Let us assume that the reserve ratio is 10%, and a client withdraws \$100. Assuming the bank needs to get \$100 in new cash, it exchanges \$100 worth of reserves for more vault cash.</p>

<ul>
<li>If the banking system does not have excess reserves, there is a shortfall if we assume that there is a 10% reserve ratio. Deposits and reserves fall by \$100, while required reserves fall by \$10. There is a shortfall of \$90. The central bank needs to inject \$90 into the banking system to get it back into balance, so the monetary base rises.</li>
<li>There is no change only if banks have excess reserves, and have no desire to rebuild them after the reserve loss. In which case, this is just a shuffling of components of the broad monetary base. However, that is not sustainable over time; banks need to rebuild liquidity positions, and so the central bank will need to inject reserves.</li>
</ul>

CC BY-SA 4.0
2020-04-28T15:40:17.417Z
What I mean here is that the m0 cannot be increased without destroying reserves, so the only way to increase the money supply would be to increase the federal reserve first and then increase the m0. But the money supply was increased at the time of federal reserves increase so when the federal reserves are exchanged for m0 this does not increase the money supply (not at this moment).
user3181821
CC BY-SA 4.0
2020-04-28T12:59:25.190Z
2020-04-28T16:12:48.313Z
2020-04-28T16:12:48.313Z
Brian Romanchuk
<p>If m0 can only be created as an exchange of federal reserve deposits does this mean that m0 does not increase money supply?</p>

<money-supply>
Does m0 increase money supply?
user3181821
# Does m0 increase money supply?

(Asked by: username_0 on 2020-04-28)

If m0 can only be created as an exchange of federal reserve deposits does this mean that m0 does not increase money supply?

**Tags:** money-supply


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## 1 answers

### Answer by username_1 on 2020-04-28. Score: 0 | Accepted answer

The instruments in M0 are part of any monetary aggregate.

Does the act of adding to M0 lower the money supply? It depends.

Let us assume that the reserve ratio is 10%, and a client withdraws \$100. Assuming the bank needs to get \$100 in new cash, it exchanges \$100 worth of reserves for more vault cash.

* If the banking system does not have excess reserves, there is a shortfall if we assume that there is a 10% reserve ratio. Deposits and reserves fall by \$100, while required reserves fall by \$10. There is a shortfall of \$90. The central bank needs to inject \$90 into the banking system to get it back into balance, so the monetary base rises.
* There is no change only if banks have excess reserves, and have no desire to rebuild them after the reserve loss. In which case, this is just a shuffling of components of the broad monetary base. However, that is not sustainable over time; banks need to rebuild liquidity positions, and so the central bank will need to inject reserves.

> **Comments:**
> **username_0**: What I mean here is that the m0 cannot be increased without destroying reserves, so the only way to increase the money supply would be to increase the federal reserve first and then increase the m0. But the money supply was increased at the time of federal reserves increase so when the federal reserves are exchanged for m0 this does not increase the money supply (not at this moment).  

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