Assignment III
1) Throw light on the components of money supply in India.
Ans. Money supply is measured by M1, M2, M3 and M4 measurement of
money supply. Every measurement has different components varying from most
liquid to most rigid form. These are:
M1- This is the narrow measure of money supply and it is composed
of following items: -
M1=C+DD+OD
Where, C= currency with public
DD= demand deposits with the public in the commercial
and cooperative banks.
OD= Other deposits with Reserve Bank of India
M2- M2 is a broader concept of money supply in India than M1. M2
includes savings deposits with the savings bank.
M2= M1+ saving deposits with PO savings banks
M3- In M3 money supply, the time deposits with banks are also
included.
M3= M1+ time deposits with the bank
M4- This includes the total deposits with PO savings organisation
along with M3 money supply.
M4= M3+ total deposit with PO savings organisation.
2). Discuss the difference between M1, M2, M3 and M4 measures of money
supply.
Ans. M1 Money Supply:
This is the narrow measure of money supply and is composed of the following
items:
Ml = C + DD + OD
Where, C = Currency with the public
DD = Demand deposits with the public in the commercial and
cooperative banks.
OD = Other deposits held by the public with Reserve Bank of India.
The money supply is the most liquid measure of money supply as the money
included in it can easily be used as a medium of exchange, that is, as a means of
making payments for transactions.
M2 Money Supply:
M2 is a broader concept of money supply in India than M1. In addition to the
three items of M1, the concept of money supply M2 includes savings deposits
with the post office savings banks. Thus,
M2 = M1 + Savings deposits with the post office savings banks.
The reason why money supply M2 has been distinguished from M1 is that
saving deposits with post office savings banks are not as liquid as demand
deposits with commercial and cooperative banks as they are not checked
accounts. However, saving deposits with post offices are more liquid than time
deposits with the banks.
M3 Money Supply or Broad Money:
M3 is a broad concept of money supply. In addition to the items of money
supply included in measure M1, in money supply M3 time deposits with the
banks are also included. Thus
M3= M1+ Time Deposits with the banks.
It is generally thought that time deposits serve as store of value and represent
savings of the people and are not liquid as they cannot be withdrawn through
drawing cheque on them. However, since loans from the banks can be easily
obtained against these time deposits, they can be used if found necessary for
transaction purposes in this way.
M4 Money Supply:
The measure M4 of money supply includes not only all the items of M3
described above but also the total deposits with the post office savings
organisation. However, this excludes contributions made by the public to the
national saving certificates. Thus,
M4 = M3 + Total Deposits with Post Office Savings Organisation.
3). Differentiate between Narrow Money and Broad Money concept.
Ans. Narrow money is a category of money supply that includes all physical
money such as coins and currency, demand deposits and other liquid assets that
is held by the central bank. This category of money is considered to be the most
readily available for transactions and commerce.
The narrow money supply only contains the most liquid financial assets. These
funds must be accessible on demand, which limits the category to physical
notes, coins and funds held in the most accessible deposit accounts.
Whereas, Broad money is a category of the Money Supply that includes a wide
scope for the definition of money including both notes and coins, but also more
illiquid forms of money, such as bank deposits, treasury bills, gilts, etc. These
are considered ‘near money’ because it can easily be changed to cash.
Broad money does not include assets, such as long-term dated securities and
shares. Although these can be sold, they are not included in terms of broad
money because they fall in the category of assets rather than money.
