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Consider the following statements: 1. Money supply is a flow variable and is measured for a certain period. 2. Interbank deposits, which one commercial bank deposits in another bank, are not included in the money supply. 3. M1 and M2 are called broad money and re-least liquid of all. Which of the above statements is/are correct?

Consider the following statements: 1. Money supply is a flow variable and is measured for a certain period. 2. Interbank deposits, which one commercial bank deposits in another bank, are not included in the money supply. 3. M1 and M2 are called broad money and re-least liquid of all. Which of the above statements is/are correct? Correct Answer 2 only

The correct answer is 2 only

Key Points

Money supply, like money demand, is a stock variable. Hence, statement 1 is incorrect.

  • 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. 
  • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply. Hence, statement 2 is correct.
  • M1 and M2 are known as narrow money. M3 and M4 are known as broad money. Hence, statement 3 is incorrect.
    • These gradations are in decreasing order of liquidity. M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. M3 is the most commonly used measure of the money supply. 

Additional Information

  • The measures of money supply in India are classified into four categories M1, M2, M3, and M4 along with M0.
  • This classification was introduced in April 1977 by the Reserve Bank of India.
  • Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.
    • M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI.
  • It is the monetary base of the economy.
    • Narrow Money (M1):
      • M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI
      • M2 = M1 + Savings deposits of post office savings banks
      • Broad Money (M3)
      • M3 = M1 + Time deposits with the banking system
      • M4 = M3 + All deposits with post office savings banks 

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