Money and Banking
Measures of money supply
Classify an item as part of M1, M3 or neither.
Money supply is the total stock of money held by the public at a point of time: currency held by the public, plus deposits in banks. (Money held by banks and the government, and interbank deposits, are not counted.)
In India, the RBI issues currency notes, and the Government of India issues coins. Both are fiat money (money because the government says so, not because of what it is made of) and legal tender (no one can refuse them in payment). Cheques are not legal tender.
Bank deposits are of two kinds:
- Demand deposits: payable on demand, such as savings and current accounts.
- Time deposits: with a fixed maturity, such as fixed deposits.
The RBI's measures of money supply, from the most liquid to the least:
| Measure | What it includes |
|---|---|
| M1 | currency held by the public (CU) + demand deposits (DD) |
| M2 | M1 + savings deposits with post office savings banks |
| M3 | M1 + net time deposits of banks |
| M4 | M3 + total deposits with post office savings organisations |
M1 and M2 are narrow money; M3 and M4 are broad money. M3, called aggregate monetary resources, is the most commonly used. A bank fixed deposit is a time deposit, so it is in M3, not M1.
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