Contains full knowledge about concept of money supply

1. Concept, Components
By: Prof. R.K.Dwivedi
GLA University
Mathura
U.P.

2. Concept of Money Supply and its Measurement
 Money supply plays a crucial role in the
determination of price stability and interest rate.
In economic analysis it is generally presumed that
money supply is determined by the policy of
Central Bank of a country and the Government.
 However, this is not fully correct as in the
determination of money supply, besides Central
Bank and Government, the public and
commercial banks also play an important role.

3. The Concept of Money Supply and its
Measurement:
 By money supply we mean the total stock of
monetary media of exchange available to a
society for use in connection with the
economic activity of the country.

4.  The money supply refers ‘to the total sum of
money available to the public in the economy
at a point of time.
 That is, money supply is a stock concept in
sharp contrast to the national income which is
a flow representing the value of goods and
services produced per unit of time, usually
taken as a year.

5.  Money supply always refers to the amount of
money held by the public.
 The term public includes households, firms and
institutions other than banks and the
government

6. Let us explain the two components of money supply at
some length.
Currency with the Public:
In order to arrive at the total currency with the public
in India we add the following items:
 1. Currency notes in circulation issued by the Reserve
Bank of India.
 2. The number of rupee notes and coins in circulation.
 3. Small coins in circulation.

7. Demand Deposits with the Public:
 The other important components of money supply
are demand deposits of the public with the banks.
 These demand deposits held by the public are also
called bank money or deposit money.

8. Definition of M0, M1, M2, M3, M4
 There are different measures of money supply.
Not all of them are widely used and the exact
classifications depend on the country.
 M0 and M1, also called narrow money, normally
include coins and notes in circulation and other
money equivalents that are easily convertible into
cash.

9.  M2 includes M1 plus short-term time deposits
in banks and 24-hour money market funds.
 M3 includes M2 plus longer-term time
deposits and money market funds with more
than 24-hour maturity.

10.  M4 includes M3 plus other deposits.
 The term Broad money is used to describe M2, M3
or M4, depending on the local practice.
 The exact definitions of the three measures
depend on the country

11. Details of Each component
1. M1 Component of Money Supply:
 This component of money supply refers to:
 (a) Currency, C, including paper money and metallic
coins of all denominations,
 (b) Net demand deposits, DD, including the savings
deposits with the banking sector, and
 (c) Other Deposits, OD, including the deposits with RBI of
quasi-government institutions such as Industrial Finance Corporation
of India, State Finance Corporations, Industrial Development Bank of
India, Agricultural Refinance and Development Corporation; deposits
of International Monetary Fund (IMF)

12. 2. M2 Component of Money Supply:
 This component of money supply is devised to
include post office savings deposits in the
M2 component of money supply. Thus,
 M2 = M1 + Post Office Savings Deposits
 Note that the time deposits remain excluded even
from M2 making it a narrow measure of money supply.
In order of liquidity, M2 ranks next to M1.

13.  3. M3 Component of Money Supply:
 M3 is the sum of M1 and the time deposits.
Hence, it represents a broader measure of
money supply and is known as the
Aggregate Monetary Resource (AMR). Thus,
 M3 = M1 + Time Deposits
 = M1 + TD
 M3 as a measure of money supply is shown
preference by RBI.

14.  4. M4 Component of Money Supply:
 M4 is the sum of M3 and the Post Office
Savings Deposits. It represents broader
concept of money supply. Thus,
 M4 = M3 + Post Office Savings Deposits

15.  While M2 is an extension of M1 M4 is an extension
of M3. M2 and M4 are recent concepts. In liquidity,
M2 ranks above M4.
 RBI periodically provides estimates of money
supply in terms of M1, M2, M3 and M4 to indicate
varying degrees of liquidity of different
components of money supply. If arranged in
descending order of liquidity, the four
components will follow the order M1, M2 M3 and
M4.
 While Ml and M2 provide the narrow measures of
money supply, M3 and M4 provide its broader
measures.

17. What are Monetary Aggregates?
 Money aggregates are broad categories that measure
the money supply in an economy. In the United States,
the standardized monetary aggregates are labeled as
 M0 (physical paper and coin),
 M1 (all of M0 plus travelers checks and demand
deposits),
 M2 (all of M1, money market shares and savings
deposits);
 an aggregate known as M3 (which includes time
deposits over $100,000 and institutional funds) has
not been tracked by the Federal Reserve since 2006
but is still calculated by analysts.