TOPIC- MEASURES OF MONEY SUPPLY

SUBMITTED TO: SUBMITTED BY:

Ms. Kulsoom Raza Kavyanjali Singh

Lucknow University, B.A. LL.B. (Hons.)

Faculty of Law, Semester 1, Section: B

Roll number: 200013015089

1
 INDEX

S.NO. TOPIC NAME PAGE NUMBER

1. Cover page. 1
2. Index. 2
3. Acknowledgement. 3
4. Introduction. 4
5. What is the measure of money supply 5
6. M1 5
7. M2 6
8. M3 7
9. M4 7
10. Conclusion 8
11. Bibliography 9

2
 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from
many people and I am extremely privileged to have got this all along the completion of my
project. All that I have done is only due to such supervision and assistance and I would not
forget to thank them. This work would not have been possible without the support and constant
help of Ms. Kulsoom Raza, Faculty of Law, University of Lucknow.

I am especially indebted to, Prof. C.P.Singh, Honorable Dean of Law Faculty, University of
Lucknow, who have been supportive of my career goals and who worked actively to provide
me with the protected academic time to pursue those goals.

I am grateful to all of those with whom I have had the pleasure to work during this. I am
thankful to and fortunate enough to get constant encouragement, support and guidance from all
my friends who helped me in successfully completing this project work. Also, I would like to
extend my sincere esteems to all family members for their timely support.

3
 MEASURES OF MONEY SUPPLY

INTRODUCTION:
The money supply is the total amount of money—cash, coins, and balances in bank accounts—
in circulation. The money supply is all the currency and other liquid instruments in a country's
economy on the date measured. The money supply roughly includes both cash and deposits that
can be used almost as easily as cash. Many countries commonly use it as an indicator of
economic performance. It means a total sum of money held by all the fellow citizens of the
country is considered as the money supply because that sum of money is actually in circulation
within the country. And the method of estimation of that Money is called as Measures of
Money Supply.

Governments issue paper currency and coin through some combination of their central banks
and treasuries. Bank regulators influence money supply available to the public through the
requirements placed on banks to hold reserves, how to extend credit and other regulation.

The money supply is commonly defined to be a group of safe assets that households and
businesses can use to make payments or to hold as short-term investments. For example, U.S.
currency and balances held in checking accounts and savings accounts are included in many
measures of the money supply.

Simply put, the money supply is the total stock of money that is in circulation in an economy on
any specific day.

4
WHAT IS THE MEASURE OF MONEY SUPPLY?

In the year 1977 central bank of India, i.e. RBI introduced four components of the money
supply. The purpose of these four components is to measure the quantity and variation of the
money supply. These components are M1, M2, M3 and M4.

The various types of money in the money supply are generally classified as Ms, such as M0,
M1, M2 and M3, according to the type and size of the account in which the instrument is kept.
Not all of the classifications are widely used, and each country may use different classifications.
The money supply reflects the different types of liquidity each type of money has in the
economy. It is broken up into different categories of liquidity or spendability.

So in simple words, if we have to measure the amount of money in circulation in the country,
we have to determine these four components given by RBI. And then we have to add all of this.

Measures of Money supply = M1 + M2 + M3 + M4

M1

Currency in Circulation – is also called narrow money and includes coins and notes that
are in circulation and other money equivalents that can be converted easily to cash. M2 includes
M1 and, in addition, short-term time deposits in banks and certain money market funds. So in
the process of determining the amount of Money which is circulation in the country, we have to
start with the most basic form of Money which we use on day to day basis.

The component M1 includes all the Money, notes, coins and currency issued by the Reserve
Bank of India. It also includes the one rupee note issued by the Government of India. M1
consists of the most highly liquid assets. That is, M1 includes all forms of assets that are easily
exchangeable as payment for goods and services.

5
Since we know that, all the currency notes are published by Reserve Bank of India except the
One Rupee note. And it is authorised by the Finance Secretary and not the Governor of RBI.

Demand Deposit – The Money which we deposit in banks (only commercial banks) are
called as a demand deposit. It is also included in M1 because the Money which we deposit in
the bank is also in circulation. We can withdraw it as per our needs and use them.
Deposit of both Current and Saving accounts are included in the demand Deposit. But the
interbank deposits are not included in demand deposit.

Other Deposit – The other deposit includes deposit made by the foreign central banks or any
organisations like World Bank or WHO in the reserve banks of India comes under the category
of other deposits. But it excludes the deposit of government of India is the RBI.

M1 = Currency in circulation + Demand Deposits + Other deposits

M2

M2 is a broader measure of money than M1. M2, also narrow money, includes all the inclusions
of M1 and additionally also includes the saving deposits of the post office banks. The M2 is
calculated by adding the M1 with Demand Deposit with Post Offices. So the question arises that
why we excluded the demand deposit of post offices while calculating M1 and why we need a
separate component M2 for that.

The answer is the Demand Deposit with Post Offices is less liquid in comparison to deposits of
banks. Here liquidity means encashing the deposit of a post office is a bit slow as compared to
commercial banks. Post office transactions are less liquid because we cannot withdraw the
deposit with the help of cheque from a post office.

M2 = M1 + Demand Deposits with the Post Offices

6
 M2 = Currency in circulation + Demand Deposit Commercial Banks Post
The third com Offices + Other Deposits

M3

M3 is an even broader definition of the money supply, including M2 and other assets even less
liquid than M2. As the number gets larger (i.e., “1, 2, 3…”), the assets included become less
and less liquid. The third component M3, is also known as the Broad Money. It is equal to the
M1 plus M2 plus time deposit with the banks. So here a new term is introduced called Time
Deposit, let’s understand what it is. M3 consists of all currency notes held by the public, all
demand deposits with the bank, deposits of all the banks with the RBI and the net Time
Deposits of all the banks in the country.

All the fixed deposit FD and the recurring deposit RD has done the people in banks are called as
time deposit. Time deposit consists of a major part of the deposit in our country. M3 is less
liquid in comparison with M1 and M2. Because when someone tries to withdraw money from
before the maturity, then bank penalises some amount from the sum.

In M3 only that Money is included which are deposited in commercial banks and not in any
post office.

M3 = M1 + M2 + Time Deposit with the Commercial Banks

M4

M4 is the widest measure of money supply that the RBI uses. It includes all the aspects of M3
and also includes the savings of the post office banks of the country. It is the least liquid
measure of all of them. Now as we know that the Post Office Banks also accepts the fixed

7
deposit, i.e. Time Deposit, so M4 calculated by adding M3 with Time deposit with the Post
offices.

M4 = M3 + Time deposit with the Post Offices

Among all these four component the M3 is the most important indicator for the RBI to analyse
the quantity and variation of Money supply because it includes Most of the Money in
circulation.

CONCLUSION:

Money forms the key part of the financial superstructure of any economy. Hence its control
becomes the basic needs in almost every micro economy system.

It is, therefore, important to identify the main determinants of the money supply. In economics,
the money supply is the total amount of monitory asset available in an economy. And it is done
by finding the components of Money Supply M1, M2, M3 and M4.

8
 BIBLIOGRAGHY

1. Principles of Microeconomics by H.L.Ahuja

2. Frank ISC Economics text book Class 12th
3. Economics For Law Students by Surabhi Arora.
4. www.economicsdiscussion.net
5. www.brainkart.com