Q. Consider the following liquid assets:

  1. Demand deposits with the banks
  2. Time deposits with the banks
  3. Savings deposits with the banks
  4. Currency

The correct sequence of these assets in the decreasing order of liquidity is

  • 1-4-3-2
  • 4-3-2-1
  • 2-3-1-4
  • 4-1-3-2

Answer: (d) 4-1-3-2

Money Supply:
  • The money supply is the total amount of currency and other liquid assets in a country’s economy on a given date. Cash and deposits that can be utilised almost as quickly as cash are included in the money supply.
    • It needs to be noted that total stock of money is different from total supply of money.
    • Supply of money is only that part of total stock of money which is held by the public at a particular point of time.
  • The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.
  • Money supply is typically categorized into different measures or aggregates, each representing a different component of the overall money stock.
    • Different monetary aggregates, such as M0, M1, M2, M3, M4, and so on, are used to measure and express the money supply.
  • RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
    • M1 = CU + DD
    • M2 = M1 + Savings deposits with Post Office savings banks
    • M3 = M1 + Net time deposits of commercial banks
    • M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
  • CU is currency (notes plus coins) held by the public, and DD is net demand deposits held by commercial banks.
  • The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply.
    • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
  • M1 and M2 are known as narrow money. M3 and M4 are known as broad money.
  • These gradations 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.
  • India’s central bank, the Reserve Bank of India (RBI), employs various tools such as Open Market Operations, CRR, SLR, Repo Rate, Reverse Repo Rate, etc. to manage money supply.
Money Supply
different types of money supply
Currency in Circulation
  • Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.
    • Monetary authorities of central banks pay attention to the amount of physical currency in circulation because it represents one of the most liquid asset classes.
  • Currency in Circulation includes notes in circulation, rupee coins and small coins.
  • The RBI has the sole right to issue currency notes. The Government of India is the issuing authority of coins and supplies coins to the Reserve Bank on demand.