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What is money supply? What are its measures?

Important banking qna for banking aspirants, which is helpful in banking exam.

Feb 9, 2015 14:29 IST
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Money Supply is the stock of currency and liquid instruments available in the economy. It generally includes cash, coins and balances held in checking and savings accounts.

Measures of Money Supply

Four alternative measures of money supply (adopted by RBI since 1977)

  • M or M1 = C + DD + OD
  • M2 = M1 + savings deposits with post office savings banks.
  • AMR or M3 = M1 + net time deposits of banks.
  • M4 = M3 + total deposits with the post-office Saving Organisation (excluding National Savings Certificates)

Here C = Currency held by public

DD = Net demand deposits of banks

OD = Other deposits of the RBI

AMR = Aggregate Monetary Resources.

In the above definitions, M1 is called narrow money and M3 is called broad money. Currency includes paper currency and coins only. Other deposits of the RBI includes deposits other than those held by the Govt (Central and State govt.), banks and a few others. They include demand deposits of quasi-government institutions (like the IDBI), foreign central banks and governments, the IMF and the World Bank etc.

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