Macro

Money & Banking

Easy

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Demand and supply of money

Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.

where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks. The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply. M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.

Which is the most commonly used measure of money supply?

✅ Correct Option: 3

Option 1 -> M1 represents the most liquid forms of money including currency and demand deposits.

Option 2 -> M2 includes M1 plus savings deposits and small time deposits.

Option 3 -> M3 is the broad money measure that includes M2 plus large time deposits and institutional funds.

Option 4 -> M4 is the broadest measure including all deposits and liquid assets.

Hence, M3 -> M3 is the most commonly used measure of money supply, especially in countries like India. It represents 'broad money' and includes currency with the public, demand deposits, time deposits, and other deposits with the banking system. Central banks prefer M3 because it provides a comprehensive view of money in the economy, capturing both transaction money and near-money assets. The Reserve Bank of India and many other central banks use M3 as the key indicator for monetary policy formulation and tracking money supply growth -> correct

Question 41

If the M1 in the economy is Rs 375 crores, net time deposits of commercial banks is Rs 250 crores and total deposits with post office savings organizations is Rs50 crores, then what will be M4?

Question 42

M3 does not include which of the following?

Question 43

Which of the following is the correct pair of narrow money?

Question 45

Which of the following is not true about currency notes and coins?

Which is the most commonly used measure of money supply?

Solution

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