Which one of the following forms of money supply is considered as the most widely used in the Indian monetary system?
- (a)M1
- (b)M2
- (c)M3
- (d)M4
Correct — C, M3. The Reserve Bank publishes four measures of money supply and the NCERT macroeconomics text says which one the system leans on in as many words: M1 equals currency with the public plus net demand deposits; M2 adds savings deposits with post office savings banks; M3 equals M1 plus net time deposits of commercial banks; M4 adds all post office deposits other than National Savings Certificates. Then, verbatim, '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.' M3 is the aggregate against which credit growth, deficit financing and monetary policy are read, which is exactly why it is the one in common use.
- (a)M1 — M1 is narrow money — currency with the public plus net demand deposits. It is the most liquid measure and the one a textbook uses to explain the money multiplier, but it leaves out time deposits, which are the bulk of what Indian households actually hold, so it is not the working aggregate.
- (b)M2 — M2 is M1 plus savings deposits with post office savings banks. It is the least used of the four in practice, because the post office savings component is small and is reported with a lag.
- (d)M4 — M4 is M3 plus total post office deposits other than National Savings Certificates. It is the widest and the least liquid measure, and it is quoted far less often than M3.
Money supply is a stock — the total money held by the public at a point of time. The Reserve Bank reports it at four levels of inclusiveness, built up from the most spendable to the least. Currency and demand deposits can be spent today; time deposits cannot be spent until they are broken; post office deposits are further removed still. M1 and M2 are therefore called narrow money and M3 and M4 broad money, and each step down the ladder trades liquidity for coverage.
The item is testing whether a candidate has read past the definitions to the sentence that says which measure is actually used. A common wrong instinct is to reason that the 'most widely used' must be the simplest, and pick M1. The opposite is true: policy and analysis want the fullest picture of purchasing power that is still meaningful, and in India that is M3, which is why the Reserve Bank's weekly statistical supplement leads with it and why the older literature calls it aggregate monetary resources. If it helps, remember that M3 is the only one of the four that appears routinely in newspaper coverage of credit and deposit growth.
- M1 equals currency with the public plus net demand deposits with commercial banks; 'net' excludes interbank deposits.
- M3 equals M1 plus net time deposits of commercial banks, and is also called aggregate monetary resources.
- M1 and M2 are narrow money; M3 and M4 are broad money; the four are in decreasing order of liquidity.
- The Reserve Bank of India is the authority that publishes all four measures.
Liquidity falls as you go down; coverage rises. M3 is where the system settles.
- Assuming the most liquid measure must be the most used — M1 is the most liquid, M3 is the most used.
- Forgetting that 'other deposits with the RBI' also sit inside M1 in the Reserve Bank's own definition, which is what an older UPSC item on broad money turns on.
- Mixing up M3 with reserve money; reserve money is the central bank's liability, M3 is the public's holding.
As a direct pick-the-measure question, as a components item asking what is included in broad money, or as a liquidity-ordering item.
Consider the following: 1. Currency with the public 2. Demand deposits with banks 3. Time deposits with banks Which of these are included in Broad Money (M3) in India?
- (a) 1 and 2
- (b) 1 and 3
- (c) 2 and 3
- (d) 1, 2 and 3
Answer(d) 1, 2 and 3
The contents of the same aggregate. Once you can build M3 as M1 plus time deposits, both this question and that one fall out of the same definition.
The sum of which of the following constitutes Broad Money in India? I. Currency with the Public II. Demand deposits with banks III. Time deposits with banks IV. Other deposits with RBI Choose the correct answer using the codes given below:
- (a) I and II
- (b) I, II and III
- (c) I, II, III and IV
- (d) I, II and IV
Answer(c) I, II, III and IV
A sharper version of the same definition, because it adds the component candidates usually forget — other deposits with the Reserve Bank, which sit inside M1 and therefore inside broad money too.
- practice — not a real PYQ
In the Reserve Bank of India's classification, which one of the following is the difference between M3 and M1?
- (a)Savings deposits with post office savings banks
- (b)Net time deposits of commercial banks
- (c)Total post office deposits
- (d)Currency with the public
Answer(b) Net time deposits of commercial banks — M3 is M1 plus exactly that.
- practice — not a real PYQ
Which one of the following pairs of money supply measures is called narrow money in India?
- (a)M1 and M2
- (b)M2 and M3
- (c)M3 and M4
- (d)M1 and M4
Answer(a) M1 and M2 — narrow money; M3 and M4 are broad money.