Which of the following are included in M1 definition of money for the Indian economy? 1. Reserves 2. Currency 3. Time deposits 4. Demand deposits Select the correct answer using the code given below.
- (a)1 and 3 only
- (b)2 and 3
- (c)2 and 4
- (d)1, 3 and 4
Correct — C, 2 and 4. The narrow measure of money is written as M1 = CU + DD, where CU is currency — notes plus coins — held by the public and DD is net demand deposits held by commercial banks. Nothing else belongs in it. Time deposits are excluded because M1 is a measure of what can be spent immediately, and a fixed deposit cannot be; they enter at the next level up, since M3 is M1 plus the net time deposits of commercial banks. Bank reserves are excluded for a different reason: reserves are what banks hold with the central bank and in their own vaults, and they are the raw material of money creation rather than money in the hands of the public. Including them would double-count, because those reserves are exactly what supports the deposits already counted. So of the four items only currency and demand deposits qualify, which gives 2 and 4.
- (a)1 and 3 only — Picks the two items that are both wrong. Reserves are not part of any money-supply aggregate held by the public, and time deposits enter only at M3.
- (b)2 and 3 — Right about currency, wrong about time deposits. Currency plus time deposits is not a measure the Reserve Bank publishes; adding time deposits to M1 gives M3, not M1.
- (d)1, 3 and 4 — Includes reserves and time deposits and then leaves out currency, which is the one item nobody disputes belongs in M1.
The Reserve Bank publishes four monetary aggregates in decreasing order of liquidity. M1 is currency with the public plus net demand deposits with banks. M2 is M1 plus savings deposits with post office savings banks. M3 is M1 plus the net time deposits of commercial banks. M4 is M3 plus total deposits with post office savings organisations, excluding National Savings Certificates. M1 and M2 are called narrow money, M3 and M4 broad money. M3 is the most commonly used measure and is also known as aggregate monetary resources.
The word 'net' in net demand deposits carries real weight and is worth remembering, because it is the reason reserves are the trap here. Only deposits of the public are counted; interbank deposits, which a commercial bank holds in another commercial bank, are left out. The same logic excludes bank reserves — they are inside the banking system rather than in the public's hands. That distinction between base money, which is currency plus bank reserves, and money supply, which is currency plus public deposits, is one that CDS returns to. Sort the four options by liquidity before answering: currency is perfectly liquid, a demand deposit is nearly so, a time deposit is locked up for a term, and reserves are not the public's to spend at all. The cut between the second and the third item is exactly where M1 ends.
- M1 = currency with the public + net demand deposits with commercial banks.
- M2 = M1 + savings deposits with post office savings banks.
- M3 = M1 + net time deposits of commercial banks; M4 = M3 + total post office deposits excluding National Savings Certificates.
- M1 and M2 are narrow money; M3 and M4 are broad money, and M3 is the most commonly used measure.
- 'Net' means interbank deposits are excluded — only deposits of the public count.
Two items are in M1, one arrives only at M3, and one is not in the money supply at all.
- Including time deposits in M1 because they are still bank deposits — they belong to M3.
- Treating bank reserves as money; they support the money supply but are not part of it.
- Forgetting that only net demand deposits count, so interbank deposits are excluded.
Asked as a statement-code item that offers one item from M1, one from M3 and one from base money, so the aggregates have to be kept apart.
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 same three deposits, asked one aggregate higher. Because M3 is M1 plus time deposits, that question takes all three while this one stops at two. Doing the pair together is the cleanest way to fix where the boundary between narrow and broad money falls.
CDS_GK_2022_II_Q512022Which 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
Answer(c) M3
CDS has asked about the monetary aggregates twice in three years, once for which one is most used and once for what M1 contains. Learn all four definitions in one sitting and both questions become one-line recall.
- practice — not a real PYQ
Which one of the following is described as 'narrow money' in India?
- (a)M1
- (b)M3
- (c)M4
- (d)Base money
Answer(a) M1 — M1 and M2 are narrow money, while M3 and M4 are broad money.
- practice — not a real PYQ
M3 differs from M1 by the inclusion of
- (a)currency with the public
- (b)net time deposits of commercial banks
- (c)bank reserves with the Reserve Bank
- (d)National Savings Certificates
Answer(b) net time deposits of commercial banks — M3 = M1 + net time deposits.