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Questions
State the meaning and components of the money supply.
Explain the concept of money supply and its components
Solution 1
Money supply means the total stock of money in circulation among the people at a particular point of time in an economy.
Money supply consists of various components as follows:
Demand, time and saving deposits in commercial banks and other types of deposits are the total amount of money in an economy. Definition of supply of money varies depending on the components which are included and excluded.
- M1 = Currency with the public + demand deposits with the commercial banks + deposits kept by commercial banks with the Reserve Bank. or M1 = C + DD + OD. Demand deposits are not for any specific period of time. They can be withdrawn as and when required. Demand deposits are chequable deposits
- M2 = M1 + Savings deposits with Post office Savings banks.
Saving deposit includes the features of both demand and term deposits. - M3 = M2 + Term deposits in Commercial banks.
Term deposits are always for a specific period of time. They cannot withdraw money as when required. They are not chequable deposits as we cannot sign a cheque against these deposits. - M4 = M3 + Savings with the Post office other than in the form of National Saving Certificate.
Solution 2
Money supply refers to the total stock of money in the form of currency notes and coins held by the people of an economy at a particular point in time.
The following are the components of money supply:
- Currency component - It includes currency notes and coins (collectively called the currency component of money supply) that are issued by the monetary authority of a country. In India, the RBI issues currency notes of various denominations such as Rs 2, Rs 5, Rs 100, Rs 500 and Rs 1000 and the Government of India issues currency coins and notes of denominations less than and equal to Re 1.
- Deposit component - It includes the savings or the current account deposits held by the public in various commercial banks of a country. Deposits held by the public can be classified into two major categories- Term Deposits and Demand Deposits.
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Read the following statements carefully:
Statement 1: Money supply (M1) in India does not include ‘demand deposits’ with commercial banks.
Statement 2: Money supply (M1) refers to, assets available with the Commercial Banks during a particular period of time.
In the light of the given statements, choose the correct alternative.
