AP MacroeconomicsMoney & Monetary Policy
Currency in Circulation
Currency in circulation is the physical cash held by the public outside banks; it counts in M1, while cash sitting in bank vaults does not.
Only currency in the hands of households and firms is part of the money supply — vault cash and Fed-held cash are excluded. Currency in circulation plus bank reserves makes up the monetary base. A common exam point: most of M1 is checkable deposits, so currency is only a small slice of the total money supply.
Formula / Example
Monetary base = Currency in circulation + Bank reserves