Chapter 14: Money – Demand, Supply and Monetary Policy.

Practical Questions.

Question 1.

Compute Money Concepts M1 , M2, M3 and M4 from the following data – (assume
amounts in ₹ Crores)

Currency held by the public
Demand deposits of banks
Net time deposits of banks
Inter-bank demand deposits
7,000 Savings deposits with post office 8,000
savings banks
13,000 Total deposits with post office 19,000
savings banks (incl. NSC)
28,000 National savings certificates (NSC) 3,000
2,000 Other deposits of RBI 4,000

Solution:

Item Consumption
M1 Currency held by the public + net demand deposits of banks (CASA deposits) +
other deposits of RBI = 7,000+(13,000-2,000)+4,000 = 22,000
M2 M1+ Savings deposits with post office (PO) Savings banks = 22,000 + 8,000 =
30,000
M3 M1+ net time deposits with the banking system = 22,000 + 28,000 = 50,000
M4 M3 + total deposits with PO savings banks (excluding NSC) = 50,000 + (19,000 –
4,000) = 65,000

Question 2.

From the following data, compute reserve money, and narrow money M1(assume
amounts in ₹ crores)

Currency held by the public 7,000 Bankers’ deposits with RBI 10,000
Demand deposits of banks 13,000 Net time Deposits of banks 28,000
Inter-bank demand deposits 2,000 Other deposits of RBI 4,000

Solution:

Item Computation (₹crores)

Reserve Currency held by the public + bankers’ deposits with the RBI + other deposits
money of RBI = 7,000 + 10,000 + 4,000 = 21,000

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 M1 Currency held by the public + net demand deposits of banks (CASA deposits)
+ other deposits of RBI = 7,000 + (13,000-2,000) +4,000 = 22,000

Question 3.

In a period, reserve money is 36,000 and narrow money M1is 42,000. If the total of
currency in circulation + other deposits of RBI is 15,000, compute – (a) Bankers’
Deposits with RBI, (b) Net demand deposits of banks. (Assume amounts in ₹ crores)
Solution:

1. Reserve money = currency held by the public + bankers’ deposits with the RBI +
other deposits of RBI
In this case, 36,000 = 15,000 + bankers’ deposits with RBI.
Hence, Bankers’ Deposits with RBI = 21,000
2. Narrow money M1= currency held by the public + net demand deposits of banks
+ other deposits of RBI.

Here, 42,000 = 15,000 + Net demand deposits of banks

So, Net Demand deposits of banks = 27,000

Question 4.

From the following data, compute𝑁𝑀1 , 𝑁𝑀2 , 𝑁𝑀3 , M1 , M2 and M3 (assume amounts in ₹
crores)

Currency in circulation with 7,000 Bankers’ deposits with RBI 6,000

public
Demand deposits of banks
Other deposits of RBI
Time deposits of Banks – short
term
Time deposits of banks – long
term
Public deposits of NBFCs
13,000 Call/term funding from financial 10,000
institutions
4,000 Total deposits with post office 19,000
savings banks (incl. NBFCs)
28,000 National savings certifications 3,000
(NSC)
64,000 Term deposits with term lending 9,000
& Re-Financing Institutions
12,000 Term borrowing by and CD’s 5,000
issued by financing Institutions

Solution:

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Note: Bankers’ Deposits with RBI is not relevant here. It is relevant only for ‘Reserve
money’.

Particulars ₹ crores
Currency with the public 7,000
Add: Demand deposits with the banking system 13,000
Add: Other deposits with the RBI 4,000
New monetary aggregate 1 (denotes as 𝑁𝑀1 ) 24,000
Add: short term time deposits of residents (including and upto contractual 28,000
maturity of 1 year)
New monetary aggregate 2 (denoted as 𝑁𝑀2 ) 52,000
Add: long term time deposits of residents 64,000
Add: call/term funding from financial Institutions 10,000
New monetary aggregate 3 (denoted as 𝑁𝑀3 ) 1,26,000
Add: all deposits with the post office savings banks (excluding National 16,000
Savings Certificates)
Liquidity aggregate 1 (denoted as 𝐿1 ) 1,42,000
Add: Term deposits with term lending institutions and re-financing 9,000
institutions
Add: term borrowing by financing Institutions and certifications of 5,000
deposits issued by financing Institutions
Liquidity aggregate 2(denoted as 𝐿2 ) 1,56,000
Add: public deposits of non-banking financial companies 12,000
Liquidity aggregate 3(denoted as 𝐿3 ) 1,68,000

Question 5.

In an Economy, Monetary base is 15,000. (assume amounts in ₹ crores) what will be the
money supplier in that economy if money multiplier is (1) 1.2, (2) 1.5 and (3) 1.8?

Solution:

M = m x MB

Where M = Money supply, m = money multiplier ratio, and

MB = Monetary Base = 15,000

If multiplier m 1.2 1.5 1.8

Money supply 1.5 x 15,000 = 18,000 1.5 x 15,000 = 22,500 1.8 x 15,000 = 27,000

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Question 6.

Compute Credit Multiplier if the required reserve ratio is 4%, 10% and 20%. For every
₹1, 00,000 deposited in the banking system, what will be the total credit money created
by the banking system in each case?
1
Solution: Credit Multiplier =Required reserve ratio. The computations are as under –

Required reserve ratio is 4% 10% 20%

1 1 1
Credit multiplier = 25 times = 10 times = 5 times
4% 10% 20%

For every ₹1, 00,000 credit 25 x 1,00,000 = 10x 1,00,000 = 5 x 1,00,000 =

money created by banks 25,00,000 10,00,000 5,00,000

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