ANINDITA CHAKRAVARTY Meaning Of Money Supply The concept of money supply can be defined as the total quantity of currency that can be included in a nations economy Money supply includes the total money both in the form of cash as well as deposits that can be used as cash easily ID: 1028183
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1. Supply of MoneyPrepared by ANINDITA CHAKRAVARTY
2. Meaning Of Money SupplyThe concept of money supply can be defined as the total quantity of currency that can be included in a nation's economy. Money supply includes the total money both in the form of cash as well as deposits that can be used as cash easily.The money supply economics is associated with the government's direct power as it is the government that issues currency either in paper form or in the form of a coin as a combination of treasuries bills and demand drafts of banks. Similarly, the banks also have control over the money supply, and they exert such influence through reserves and credit controls.
3. Effect of Money Supply on the Economy:A rise in the money supply will reveal its effect by decreased interest rates and price values of commodities and services. Whereas a decrease in money supply will result in increased interest rates, price values with a coupled increase in banks' reserves.An effect similar to this occurs on the business as well. As the price levels lower due to increased money supply, the production in business will increase to accommodate people's increased spending. Thus, the money supply and money demand directly impact the macroeconomics of a nation's market.
4. Components Of Money SupplyTwo components of the money supply regulate its structure and flow. Currency: Government produces currency in two forms, i.e., coins and paper currency. Thus, money supply through currency can also be divided into:Paper Currency/ Notes: The production of currency notes is under the control of the government as well as the reserve bank of India. In the country, only one-rupee paper currency is produced by the government, while RBI produces all the other currency notes.Coins: The second form of currency in India, the coins, are produced in two variants viz token coins and the standard coins characterized as full-bodied coins. The full-bodied currency coins are of little value today under the current currency system. The token coins represent the value of 50 paise and 25 paise.
5. Demand Deposits:The demand deposits are a part of commercial banks and are used as a non-confidential fund. These accounts are considered money when included under the economy of a country. Such deposits' working mechanism is similar to that of a checking account where withdrawals from the fund can be made without notice.
6. Measures of Money SupplyWe shall now understand the different methods used to measure India's supply of money.As mentioned before, money production is largely governed by the Reserve Bank of India or RBI. Therefore, it is the RBI that is responsible for the measures of the money supply.There are four types of methods used by RBI to measure the supply of money in India. Let's take them one by one:
7. The first measure is denoted as M1, and it is represented as the formula. M1 = C + DD + ODWhere C represents the currency, including both paper currency and coins.DD represents the demand deposits made in the banks.OD represents the other types of deposits made in RBI, like deposits from public sector financing, foreign banks, or international institutions such as the IMF.
8. The next measure under the RBI approach to the money supply is denoted as M2. Under the first approach, the deposits made in a savings account are not included as money supply. The second methods compensate this by adding the savings account. Thus, M2 = M1 + deposits made as savings deposits in Post office savings banks.
9. The third method under the RBI approach of money supply includes the net deposits made under a specified period with the banks. It includes the normal money supply and net deposits.M3 = M1 + Net Time-deposits included in banks.
10. The final measure of money supply included under RBI guidelines accumulates Post office savings banks' deposits and the total deposits except those from National Saving Certificate. Thus, M4 = M3 + Deposits made with Post-office savings institute.
11. NOTEThus, M1 is the most liquid measure of the money supply, as it only includes currency and demand deposits. The M1 and M2 are considered narrow money supply measures, and M3 and M4 measure the broad money by including other forms of savings.
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