Measures of Money Supply Aim Institute of Economics

Other deposits held by the central or state government with RBI such as RBI Employees Pension and Provident Funds are excluded. The RBI report after demonetisation had mentioned that 99.3% of all demonetised currency returned to the banking system. Even though the money supply can be denoted either as M1 or M3, usually when we speak of money supply, we intend M3. M3 includes Currency in Circulation and Checkable Bank’s Deposits.

These policies then assist in dealing with undesirable levels of inflation or deflation. Very often, the money supply in the economy is represented using a monetary aggregate called ‘broad money’, also denoted as M3. To understand the money supply in the economy RBI uses monetary aggregates like M0, M1, M2, M3 etc. Different monetary aggregates, such as M0, M1, M2, M3, M4, and so on, are used to measure and express the money supply. Vedantu provides notes and questions on the supply of money. It covers topics such as the supply of money, supply of money components, various measures of the supply of money, and so on.

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Narrow money in the US is known as M1 (M0 + demand accounts). The money supply is the total amount of currency and other liquid assets in a country’s salary of cio in india economy on a given date. Cash and deposits that can be utilised almost as quickly as cash are roughly included in the money supply.

  • Money is accepted as a means of exchange or as a measurement of the value of goods.
  • Such deposits’ working mechanism is similar to that of a checking account where withdrawals from the fund can be made without notice.
  • The supply of money, on the other hand, is a different concept.
  • In the country, only one-rupee paper currency is produced by the government, while RBI produces all the other currency notes.
  • This number is multiplied by the amount of reserves to estimate the maximum potential amount of the money supply.
  • Commercial bank money refers to commercial banks’ obligations, such as current and savings accounts.

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Money supply is a flow variable and is measured for a certain period.

Commercial bank money – obligations of commercial banks, including current accounts and savings accounts. Although M1/M0 is used to characterise narrow money, M2/M3/M4 counts as broad money and M4 represents the biggest money supply term. Broad money can include numerous deposit-based accounts that would take more than 24 hours to mature and be considered public. These are often referred to as long-term deposits, as their production is constrained by a certain time.

which is the concept m3 of money supply

The demand deposits are a part of commercial banks and are used as a non-confidential fund. These accounts are considered money when included in the economy of a country. Such deposits’ working mechanism is similar to that of a checking account where withdrawals from the fund can be made without notice. It is generally believed that the time deposits serves as a store of value and shows the savings of the people.

Components of the Money Supply

The measures of money supply in India are classified into four categories M1, M2, M3, and M4 along with M0. Supply of money is only that part of total stock of money which is held by the public at a particular point of time. It needs to be noted that total stock of money is different from total supply of money. Currency in circulation, which measures money with the public and in banks, has also surged. This money supply is the most liquid measure of money supply because the money included in this can easily be used as a medium of exchange.

M2 includes all components of M1 and saving deposits with the post office saving banks. The different measures of money supply are used to do the monetary analysis and to make right monetary policy for economic growth and development. Did the government’s move to demonetise Rs 500 and Rs 1,000 currency notes improve the balance sheet of Reserve Bank of India ?

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This means that the money the public hold in hand or in the bank is a debt guaranteed by the government . The currency thus represents a ‘public debt’ owed by the government to the holders of the banknotes – the public. Measure of the money supply is less liquid than the M2 measure.

  • When Reserve Ratio is 1/4 (25%) or when Money Multiplier is 4, that would generate only Rs. 400 as money supply.
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  • The Reserve Bank of India measures and publishes the money supply on a weekly or fortnightly basis in India.
  • The money supply has long been thought to be an important element in determining macroeconomic performance and business cycles.
  • To understand this scenario, we must learn the interplay of currency, reserve money and money supply.

The Reserve Bank of India measures and publishes the money supply on a weekly or fortnightly basis in India. The money supply is sometimes referred to by terms such as Narrow Money and Broad Money. Where C represents the currency, including both paper currency and coins. As mentioned before, money production is largely governed by the Reserve Bank of India or RBI. Therefore, it is the RBI that is responsible for the measures of the money supply.

M1: Narrow Money

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