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Money supply is the entire stock of currency and other liquid instruments circulating in a country’s economy as of a particular time.
It is also referred to as money stock. Money supply includes safe assets, such as cash, coins, and balances held in checking and savings accounts that businesses and individuals can use to make payments or hold as short-term investments.
Previously Traditional Money supply was== currency held by the public ( coins + currency notes ) + banks deposit.
But, Modern approach of Money Supply defines =coins+ currency notes + demand deposits + time deposit + financial assets + bills + bonded and securities + credit cards
Types Of Money Supply
M0: Reserve money → It is the sum of components like :-
♦Currency in Circulation
♦Bankers’ Deposits with RBI
♦Other Deposits with RBI
So these 3 terms are IMP here to calculate M0 or Reserved Money.
Suppose ,Currency in Circulation= 13610 B Rs
Bankers’ Deposits with RBI = 3567
’Other’ Deposits with RBI = 97
Total M0 will be== Reserve Money==17274 B Rs.
M1 :- known as ‘transaction money . Here also we consider some terms like
Currency with public
Demand deposit in all banks ( current account, savings account)
Other deposits with RBI.
Simply we use one formula here, i.e M1 + Post office bank savings
Similarly like regular banks, Post office also offers their time savings account, recurring deposit account, time deposit account but Here we count the Post office savings (=”DEMAND deposit” type) only.
M3 (Broad Money) :-
It’ nothing just we need to use
M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits).
Suppose , Currency with public = 13000 Billion Rs,
Demand deposit in all banks ( current account, savings account) = 8000 Billion Rs.
Bank’s Time deposits = 30,000 Billion Rs.
other deposits with RBI = 102 Billion Rs.
So here M1= 13,000+ 8000 + 102 = 21,102 Billion Rs.
M3 will be= 21,102 + 30,000= 51,102 Billion Rs.
Hope , Its clear now about all terms related to Money Supply.
M4= M3 + total post office deposits.
Meaning those Post Office “time deposits” and “recurring deposits” also. But excludes national savings certificate etc.
One more term , we use here i.e Money multiplier
Simply we use one formula here – Broad money (M3) divided by Reserve Money (M0)
In above Example we got = M0= 17274 B Rs. & M3= 51,102 Billion Rs.
M3 / M1 = 2.95 i.e our Money Multiplier.
One more Term ,Here comes i.e Velocity of money circulation
It is the avg. number of times money passes from one hand to another, during given time period.
Ex→ you bought pen worth Rs.10 from shopkeeper, he uses same 10 rupee note to buy Cocacola=> then same currency note performed function of TWENTY Rupees. This is called “Velocity of money”
The Velocity of money always depends on Money Supply. That means When Money supply increases then Velocity of Money also will Increase.