Q.2. Inflation in Business Environment.

Ans- Inflation in the business environment refers to the general increase in prices of goods
and services within an economy over a specific period. This increase in prices leads to a
decrease in the purchasing power of money, impacting businesses in various ways. “Inflation
is a state in which the value of money is falling; prices are rising.”
• Causes of Inflation:
1) Increase in Demand- (factors)
✓ Increase in Public Expenditure
✓ Increase in Private Expenditure
✓ Increase in Exports
✓ Reduction in Taxation
✓ Rapid Growth of Population
2) Decrease in supply- (factors)
✓ Shortage of Supply of factors
✓ Hoarding by traders
✓ Hoarding by Consumers

• Affects of Inflation:
1. Cost of Goods and Services: Inflation typically leads to an increase in the cost of raw
materials, labour, and other inputs needed for production. Businesses may have to
spend more to acquire the same quantity of goods and services, affecting their profit
margins.
2. Profit Margins and Pricing: Businesses may face challenges maintaining their profit
margins as the cost of production rises. To compensate, they may increase the prices of
their products or services, which can impact consumer demand and market
competitiveness.
3. Consumer Demand: Inflation can affect consumer purchasing power, leading to a
decline in consumer demand for non-essential or higher-priced items. This reduction in
demand can affect businesses, particularly those in retail and other consumer-driven
sectors.
4. Investment Decisions: Inflation can influence investment decisions. Businesses may
prioritize investments that can help them hedge against inflation, such as investing in
assets that tend to appreciate in value during inflationary periods (e.g., real estate,
commodities).
5. Borrowing Costs: Inflation can affect interest rates, making borrowing more
expensive for businesses. Higher borrowing costs can deter businesses from taking out
loans for expansion or capital investment, impacting their growth plans.
6. Currency Fluctuations: Inflation can affect the exchange rates of a country's
currency, impacting international trade and businesses that operate in multiple
countries. Fluctuating exchange rates can affect the costs of imports and exports.
 7. Planning and Budgeting: Inflation complicates financial planning and budgeting for
businesses. They need to account for potential cost increases and uncertainties in
pricing, making accurate financial projections more challenging.
To navigate an inflationary business environment successfully, businesses often employ
strategies such as effective cost management, optimizing pricing strategies, diversifying
investments, and closely monitoring market trends and economic indicators. Additionally,
collaborating with financial advisors and staying informed about monetary policies and
economic forecasts can be essential for making informed business decisions during periods
of inflation.

Q.3. Fiscal Policy.

Ans- Fiscal policy is a policy that guides the government in deciding-
How much it should spend, where it should spend, from where will they get the money?
• Through fiscal policy the government can influence production, distribution,
consumption and resource allocation.
• Fiscal policy is formulated and implemented by the government to achieve certain pre-
determined objectives.
• Fiscal policy is concerned with public revenue, public expenditure and public debt.
• Fiscal policy is pursued by modern governments to achieve certain objectives. The
objectives differ from country to country depending upon their own economic condition
and priorities.
• However, the main objectives are:
1) To achieve optimum allocation of resources.
2) To increase effective demand and thereby to achieve full employment and maintain it.
3) To ensure price stability.
4) To bring about greater equality in the distribution of income and wealth.
• To achieve these objectives a number of policies are available to instruments of
fiscal the be analysed as follows:
1. Taxation:
✓ Apart from being the main source of revenue to the government, taxation is a
powerful fiscal weapon in the hand of the government.
✓ Through taxation the government can influence production, consumption,
distribution and allocation of resources. Governments impose both direct and
indirect taxes.
✓ Taxes are levied on the principle of ability to pay. Hence the rich are taxed more
than the poor.
2. Public Expenditure:
✓ The expenditure incurred by the government in the process of discharging its
functions is called as public expenditure.
✓ Some of the major items of expenditure of the government are administrative
expenses, defence expenditure, expenditure incurred for the development of
 agriculture, industry, transport, communication, subsidies to be provided to the
various sectors, interest payments etc.
✓ If the public expenditure is productive, it has favourable effects on the economy.
✓ If the public expenditure is unproductive, then the economy will suffer from
adverse consequences like inflation, misallocation of resources, shortages, etc.

3. Public Debt:
✓ When the expenditure of the government exceeds its revenue, it resorts to public
debt.
✓ It is also helpful to the government to finance a war or to meet unexpected
expenditure due to natural calamities etc.
✓ Apart from a source of revenue to the government, it is also useful to the
government to control inflation.
✓ While depending upon public debt, the government has to be careful in utilising the
funds.
4. Deficit Financing:
✓ Deficit financing is another useful fiscal weapon for modern governments to
achieve their socio-economic objectives.
✓ Deficit financing is resorted by governments when their expenditure exceeds their
revenue.
✓ It refers to borrowing from the Central bank or running down cash balances of the
Central government with the Central Bank.

Q.4. National Income.

Ans- The total income of the nation is called "national income." The aggregate economic
performance of the whole economy is measured by the national income data.
• National income is total money value of all the goods and services produced in an
economy in a financial year.
• Ideally National Income of a country should increase so that there is growth in the
economy of a country.
• Measurement of National Income-
• GDP-
Gross Domestic Product refers to the monetary value of final goods & services produced
within an economy within a financial year. For example, an Indian producing goods in
abroad is not considered in GDP, but a foreigner producing goods in India will be
considered in GDP. Also, production of intermediate goods is not considered in GDP.
• GNP-
Gross National Product refers to the monetary value of goods and services produced by
normal residents of a country both domestically and internationally in a Financial Year.
For example, an Indian doing business in abroad, income earned by his business will be
considered in the GNP even though it is not produced in the country. While the foreigner
doing business in India, his income will not be considered in GNP.
• NNP-
Net National Product is simply GNP – Depreciation. It is the purest form of income of a
nation.
• NDP-
Net Domestic Product is calculated by subtracting depreciation from GDP. It provides a
more accurate measure of the net value of goods and services produced after accounting
for the depreciation of capital.
• PI-
Personal income is the total income earned by individuals from all sources, including
wages, salaries, rents, and dividends. It excludes business taxes and depreciation.
• DI-
Disposable income is the income available to individuals after deducting personal taxes.
It represents the amount of money people have available for consumption and saving.

Q.5. IMF, World Bank, Exchange Rate.

Ans-
1. International Monetary Fund (IMF):
The IMF is an international organization established to promote global economic
stability and growth by providing financial assistance, policy advice, and technical
assistance to its member countries. The IMF aims to ensure the stability of the
international monetary system. IMF mainly focuses on supervising the international
monetary system along with providing credits to the member countries. The functions
of the International Monetary Fund can be categorized into three types:
1) Regulatory functions: IMF functions as a regulatory body and as per the rules of the
Articles of Agreement, it also focuses on administering a code of conduct for
exchange rate policies and restrictions on payments for current account transactions.
2) Financial functions: IMF provides financial support and resources to the member
countries to meet short term and medium-term Balance of Payments (BOP)
disequilibrium.
3) Consultative functions: IMF is a Centre for international cooperation for the member
countries. It also acts as a source of counsel and technical assistance.
➢ The main objectives of the International Monetary Fund (IMF) are mentioned below:
1. To improve and promote global monetary cooperation of the world.
2. To secure financial stability by eliminating or minimizing the exchange rate stability.
3. To facilitate a balanced international trade.
4. To promote high employment through economic assistance and sustainable economic
growth.
5. To reduce poverty around the world.

2. World Bank:
The World Bank is a global financial institution that provides loans, grants, and
technical assistance to developing countries for projects and programs aimed at
reducing poverty and promoting sustainable economic development. It comprises two
main institutions: the International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA). Key functions of World Bank
include-
1. Financial Assistance for Development Projects: The World Bank offers financial
support for a wide range of development projects and programs, including
infrastructure development (roads, bridges, energy, water supply), education,
healthcare, agriculture, environmental sustainability, and more. These projects aim to
improve the economic and social conditions of the recipient countries.
2. Poverty Reduction and Social Development: Poverty reduction is a central focus of
the World Bank's work. It supports initiatives that address poverty-related issues,
including access to basic services, social safety, and skills development.
3. Research and Data Collection: The World Bank conducts research, collects data, and
publishes reports to inform policymakers and the public about global economic and
development issues.
4. Disaster Response and Resilience: The World Bank assists countries in preparing for
and recovering from natural disasters and crises. It helps build resilience to shocks by
supporting disaster risk reduction, climate change adaptation, and recovery efforts in
affected regions.

3. Exchange Rate:
An exchange rate is the value of one country's currency in terms of another country's
currency. Exchange rates can be either fixed or floating. Fixed exchange rates are
decided by central banks of a country whereas floating exchange rates are decided by
the mechanism of market demand and supply. Supply and demand dictate foreign
exchange rates. For example, greater demand for British goods would see an increase in
the value (appreciation) of the Pound.
Here are some of the top factors that can affect an exchange rate:
1. Inflation Rates-
Changes in market inflation cause changes in currency exchange rates. A country with a
lower inflation rate than another's will see an appreciation in the value of its currency.
The prices of goods and services increase at a slower rate where the inflation is low. A
country with a consistently lower inflation rate exhibits a rising currency value while a
country with higher inflation typically sees depreciation in its currency and is usually
accompanied by higher interest rates.
2. Interest Rates-
How do interest rates affect money exchange rates? Changes in interest rate affect
currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all
correlated. Increases in interest rates cause a country's currency to appreciate because
higher interest rates provide higher rates to lenders, thereby attracting more foreign
capital, which causes a rise in exchange rates.
3. Country's Current Account/Balance of Payments-
A country's current account reflects balance of trade and earnings on foreign
investment. It consists of total number of transactions including its exports, imports,
debt, etc. A deficit in current account due to spending more of its currency on importing
products than it is earning through sale of exports causes depreciation. Balance of
payments fluctuates exchange rate of its domestic currency.
4. Government Debt-
Government debt is public debt or national debt owned by the central government. A
country with government debt is less likely to acquire foreign capital, leading to
inflation. Foreign investors will sell their bonds in the open market if the market
predicts government debt within a certain country. As a result, a decrease in the value of
its exchange rate will follow.
5. Terms of Trade-
A trade deficit also can cause exchange rates to change. Related to current accounts and
balance of payments, the terms of trade is the ratio of export prices to import prices. A
country's terms of trade improves if its exports prices rise at a greater rate than its
imports prices. This results in higher revenue, which causes a higher demand for the
country's currency and an increase in its currency's value. This results in an
appreciation of exchange rate.
6. Political Stability & Performance-
A country's political state and economic performance can affect its currency strength. A
country with less risk for political turmoil is more attractive to foreign investors, as a
result, drawing investment away from other countries with more political and economic
stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its
domestic currency. A country with sound financial and trade policy does not give any
room for uncertainty in value of its currency. But, a country prone to political
confusions may see a depreciation in exchange rates.
Q.6. Union Budget- Allocation & Objectives. Summary of BUDGET 2023.
Ans- The Union Budget in India is the annual financial statement presented by the Finance
Minister in Parliament. It outlines the government's revenue and expenditure for the
upcoming fiscal year (April 1 to March 31). Budget cannot be passed until the Parliament
approves it.

• The Union budget is a spending plan based on income and expenses. It’s an estimate of
how much money you’ll make and spend over a certain period. It is known as the
“Annual Financial Statement” according to Article 112 of the Constitution of India.
• The budget allocates resources to various sectors of the economy, including health,
education, agriculture, defence, infrastructure, social welfare, and more. These
allocations are based on the government's priorities and policies to address specific
challenges and promote development.
• Union Budget is classified into-
✓ Revenue Budget- The revenue budget includes the government's revenue receipts
and expenditures. Revenue receipts and expenditure are recurring transactions. For
example, tax revenue, expenditure incurred on the welfare of citizens, etc.
✓ Capital Budget- The Capital Budget includes capital receipts and payments of the
government. Capital receipts and payments are one-time transactions. For example,
loans from foreign governments, RBI, and expenditure on infrastructure of the
country.

➢ Objectives of Budget-
1) Resource Reallocation – The government budget plays a pivotal role in
redistributing resources in a way that aligns with the social and economic benefits
of the country. This allocation is influenced by various factors.
2) Allowances and Tax Concessions – To incentivize investment, the government
often provides allowances and tax concessions to manufacturers.
3) Economic Stability – The budget also serves as a tool to prevent significant
fluctuations in the economy and maintain financial stability. This is achieved
through strategic policies such as implementing a deficit budget during deflation
and a surplus budget during inflation.
4) Management of Public Enterprises – Many public sector industries are
established for the social welfare of the populace. The budget allocates provisions
for the operation of such enterprises and provides necessary financial assistance.
5) Economic Growth – The economic growth of a country is heavily reliant on the
rate of investments and savings. Thus, the budget aims to mobilize adequate
resources for investment in the public sector and boost the overall rate of
investments and savings.
1) Summary of Budget 2023-24:
• India intentionally prepares deficit budget, which means that expenses are greater
than income.
• This year India’s estimated net income is 26 lakh crores while it’s estimated
expenses are around 45 Lakh crores. The remaining amount will be borrowed from
abroad or IMF or world bank. This show India’s budget is deficit budget.
• The highest allocation of funds for expenditure in budget is for Finance Ministry
which consists of interest payments that are up to 10 Lakh Crores.
• Second highest is for Ministry of Defence for upgradation in defence of India.
• One good thing about this year’s budget is that it mainly focuses on capital
expenditure like roadways, railways and other infrastructures rather than revenue
expenditure. When we spend on infrastructure then their returns are more and over a
longer period.
• This year’s budget is a ‘Vision for Amritkal’ and it mainly focuses on-
a) Opportunities for youth,
b) Growth and job creation,
c) Strong and stable Macro-economic environment.
• This year’s budget consists of 7 priorities which are named as “Saptarishi”. They
are-
i. Inclusive development
ii. Infrastructure and Investment
iii. Unleashing the Potential
iv. Green growth
v. Financial Sector
vi. Youth power
vii. Reaching the last mile
• The current year’s economic growth is estimated to be at 7%. The growth rate for
year 2023-24(next year) is estimated to be between 6-6.8%.
• India’s Vision for 2030 is to be World’s 3rd largest economy.
• Government is also encouraging startups, business and manufacturing sectors to
grow as it will boost the economy at a large scale.
• India wants to be the highest producer of solar energy in the world.
• Agri credit has been increased and farmers will be encouraged and supported to
focus on natural farming.

2) Numbers of Budget 2023-24-

o Fiscal deficit fixed at 5.9%.
o The rebate limit in the new tax regime for personal income tax has been increased to ₹ 7 lakh
from ₹ 5 lakh.
o The tax structure in the new personal tax regime has been changed by reducing the
number of slabs to five and increasing the tax exemption limit to ₹ 3 lakh.
Q.7. Political environment of business- State & Central.
Ans- Political environment in India is divided into three categories, they are- Executive,
Legislative and Judicial.
• Executive power refers to the Prime Minister, the President and the Cabinet on
Ministers.
• Legislative power refers to the Parliament that is the supreme legislative body of the
Indian Union. It consists of two houses, Loksabha and Rajyasabha.
• The Judicial power consists of the Courts of the country. Supreme court is the apex
court of the country. Below it is High courts, District courts, Civil courts, Fast track
courts, etc.

1) Functions and Powers of the Prime Minister-

✓ He proposes the names of the members of his Cabinet to President for appointment as
Ministers.
✓ He decides the distribution of charge to various ministers and can reshuffle their
cabinet also.
✓ He presides over the meetings of Cabinet and can change the decisions taken therein.
✓ He can suggest the President of India about the resignation or removal of any Minister
from his Cabinet.
✓ He also controls and directs the functioning of Ministers in the Cabinet.
✓ He can resign anytime and can suggest the President of India to dissolve the Cabinet.
He can suggest the President to dissolve Lok Sabha and to organize fresh elections.
2) Functions and Powers of the President-
✓ The President is the ceremonial head of the state.
✓ The President appoints the Prime Minister and other Council of Ministers.
✓ The President appoints the Attorney General of India, Governors of States, the Chief
Justice and Judges of the Supreme Court, and the Judges of the High Courts.
✓ The President has special powers during a state of emergency, which can be of three
types: National Emergency, State Emergency (President's Rule in a state), and
Financial Emergency.
✓ The President is the Supreme Commander of the Indian Armed Forces.
✓ Bills passed by both Houses of Parliament require the President's assent to become
law.
 A) Lok Sabha:
• It is also known as House of People, and members of Lok Sabha are elected by direct
election for a time period of maximum five years.
• The maximum number of people that can be elected in Lok Sabha is 552. Out of these
552 people, 530 are elected to be members of the states. While 20 are the members
represented in the union territories. The remaining 2 people are from the Anglo-Indian
community that is elected by the president of India.

B) Rajya Sabha:
• It is also known as Council of States, and members of Rajya Sabha are indirectly
chosen.
• The elected members of legislative assemblies of state are the members of Rajya Sabha.
The maximum people that can be elected in Rajya Sabha is 250. Out of this, 238 are
elected as the state representatives. While the remaining 12 are nominated by the
president.

➢ Judiciary-
Hierarchy of courts-
Supreme court - High courts - District courts (Civil courts, Criminal courts) – Village
courts – Tribunals

➢ Coalition Government-
• The features of a Coalition Government are highlighted below:
1. Coalition is formed for the sake of reward, material or psychic
2. A coalition implies the existence of a least two partners
3. The underlying principle of a coalition system stands on the simple fact of temporary
conjunction of specific interest.
4. Coalition politics is not a static but a dynamic affair as coalition players and groups
can dissolve and form new ones
5. The keynote of coalition politics is compromise and rigid dogma has no place in it.
6. A coalition works on the basis of a minimum programme, which may not be ideal for
each partner of the coalition.
7. Pragmatism and not ideology is the hall-mark of coalition politics. In making political
adjustments, principles may have to be set aside.
8. The purpose of a coalition adjustment is to seize power.
Q.8. Central bank (RBI).
Ans- Reserve Bank of India being an apex body of the centre enjoys enormous power and
functions under banking system in India. It has monopoly over the issue of bank-notes
and monetary system of the country. These power and functions as to issue of bank notes
and currency system are governed by the Reserve Bank of India Act, 1934.
➢ Main Functions of RBI:

1) Issue of Currency Notes:

The RBI has the sole right or authority or monopoly of issuing currency notes except
one rupee note and coins of smaller denomination. These currency notes are legal
tender issued by the RBI. The RBI has powers not only to issue and withdraw but even
to exchange these currency notes for other denominations.

2) Banker to other Banks:

The RBI being an apex monitory institution has obligatory powers to guide, help and
direct other commercial banks in the country. The RBI can control the volumes of
banks reserves and allow other banks to create credit in that proportion. Every
commercial bank has to maintain a part of their reserves with its parent's viz. the RBI.
Similarly, in need or in urgency these banks approach the RBI for fund.

3) Banker to the Government:

The RBI being the apex monitory body has to work as an agent of the central and state
governments. It performs various banking function such as to accept deposits, taxes and
make payments on behalf of the government. It works as a representative of the
government even at the international level. It maintains government accounts, provides
financial advice to the government. It manages government public debts and maintains
foreign exchange reserves on behalf of the government.

4) Exchange Rate Management:

It is an essential function of the RBI. In order to maintain stability in the external value
of rupee, it has to prepare domestic policies in that direction. Also, it needs to prepare
and implement the foreign exchange rate policy which will help in attaining the
exchange rate stability.

5) Supervisory Function:
The RBI has been endowed with vast powers for supervising the banking system in the
country. It has powers to issue license for setting up new banks, to open new branches,
to decide minimum reserves, to inspect functioning of commercial banks in India and
abroad, and to guide and direct the commercial banks in India.

➢ Developmental / Promotional Functions of RBI:

1) Development of the Financial System:

The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid
economic development of the nation.
 2) Development of Agriculture:
In an agrarian economy like ours, the RBI has to provide special attention for the credit
need of agriculture and allied activities. It has successfully rendered service in this
direction by increasing the flow of credit to this sector.

3) Provision of Industrial Finance:

Rapid industrial growth is the key to faster economic development. In this regard, the
adequate and timely availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in setting up special
financial institutions such as ICICI Ltd. IDBI.

4) Publication of the Reports:

The Reserve Bank has its separate publication division. This division collects and
publishes data on several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual Report.

5) Promotion of Banking Habits:

As an apex organization, the RBI always tries to promote the banking habits in the
country. It institutionalizes savings and takes measures for an expansion of the banking
network. During economic reforms it has taken many initiatives for encouraging and
promoting banking in India.

Q.9. Socio-cultural environment of Business.

Ans- The socio-cultural environment of business encompasses the societal and cultural
factors that influence the business environment, operations, strategies, and relationships with
stakeholders. Understanding these elements is crucial for businesses to effectively engage
with customers, employees, and communities. Here are key aspects of the socio-cultural
environment of business:

1. Cultural Norms and Values:

Understanding the cultural values, beliefs, traditions, and practices of a society is vital.
Different cultures have diverse approaches to business interactions, ethics, and decision-
making processes.
2. Demographics:
Demographic factors such as age, gender, education, occupation, family structure, and
population trends influence product preferences, market demand, and workforce
dynamics.
3. Consumer Behaviour:
Analysing consumer preferences, purchasing patterns, and attitudes towards products
and services helps tailor marketing strategies and product offerings to specific target
markets.
4. Lifestyle and Consumption Patterns:
Understanding how people live, work, and spend their leisure time helps in developing
products and services that align with their lifestyles and preferences.
5. Language and Communication:
Effective communication in the local language and understanding language nuances is
essential for marketing, advertising, and customer service.
 6. Social Values and Ethics:
Business operations should align with the prevailing social values and ethics of a
society, including issues related to sustainability, corporate social responsibility (CSR),
and fair business practices.
7. Education and Knowledge:
Levels of education and knowledge in a society influence skill availability, talent pool,
and the adaptability of the workforce to technological advancements and changes in
business practices.
8. Cultural Sensitivity and Diversity:
Businesses need to be sensitive to cultural differences and diverse perspectives, both
within the workforce and in their consumer base, to foster an inclusive and equitable
environment.
9. Social Trends and Movements:
Awareness of current social trends, movements, and public opinions is crucial to
respond to changing consumer expectations and to align business practices with societal
concerns.

Understanding and adapting to the socio-cultural environment of a particular region or market

is essential for successful market entry, establishing brand identity, managing human resources,
and building sustainable and meaningful relationships with customers and communities.

Q.10. Money demand and Money Supply.

Ans-
➢ Money is an asset and thus the demand for money exists because the public wants to
own it. Of course, the reason for holding money and the time period for which it is
held differs from person to person. The total amount of money demanded in an
economy is thus the total amount of money demanded by all individuals/households
in that economy.
➢ The supply of money in an economy at any point in time refers to the amount of
money held by households and businesses for transactions and debt settlement. We
exclude money held by the government and money held by the commercial banking
sector from commonly accepted measures of money supply.

➢ What is Demand for Money?

✓ In economics, demand for money is commonly associated with cash or bank demand
deposits. In general, the nominal demand for money increases with the level of
nominal output and decreases with the nominal interest rate.
✓ The demand for money is influenced by a variety of factors, including income level,
interest rates, inflation, and future uncertainty.
✓ The impact of these factors on money demand is typically explained in terms of the
three motives for demanding money:
1) Transaction motive – It refers to the demand for money to meet the current needs of
individuals and businesses.
 2) Precautionary motive – It refers to people's desire to save money for various
contingencies that may arise in the future.
3) Speculative motive – It refers to the motivation of individuals to hold cash in order to
profit from market movements regarding future changes in the interest rate.
• Monetary policy can help to stabilise an economy when the demand for money is
stable. When the demand for money is not stable, real and nominal interest rates
change, and economic fluctuations occur.
• The demand for money explains people's desire for a specific amount of money.
• Money is required to manage transactions, and the value of the transactions
determines how much money people wish to keep.
• The greater the number of transactions, the greater the amount of money demanded.
• Since the quantity of transactions is determined by earnings, it should be obvious that
an increase in earnings leads to an increase in the demand for money.
• When people save their money rather than putting it in a bank where it earns interest,
the money they save is also subject to the rate of interest.
• People become less focused on stockpiling money when interest rates rise, because
holding money leads to holding less interest-earning deposits. As a result, at high
interest rates, the amount of money demanded decreases.

➢ What is the Supply of Money?

• Money supply is a stock variable, just like money demand. Money supply refers to the
total stock of money in circulation among the general public at any given time.
• The RBI publishes figures for four different measures of money supply, namely M1,
M2, M3, and M4. They are defined as below:
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)
where, CU is public currency (notes and coins) and DD is net demand deposits held by
commercial banks. The term 'net' implies that only public deposits held by banks are to be
included in the money supply.
• Interbank deposits held by a commercial bank in other commercial banks are not
considered part of the money supply.
• M1 and M2 are referred to as narrow money. M3 and M4 are referred to as broad
money.
• The gradations are listed in decreasing order of liquidity. M1 is the most liquid and
easiest to transact with, whereas M4 is the least liquid.
• M3 is the most commonly used money supply measure. It's also referred to as
aggregate monetary resources.
• Credit control policies imposed by a country's banking system aid in determining the
total supply of money.
• The money supply is solely determined by the central bank and is unaffected by
interest rates. As a result, the money supply curve is vertical at the quantity of money
supply, rather than upward or downward sloping.
• Since the central bank has control over the money supply, it can take actions to
increase or decrease the money supply. Changes in the money supply cause interest
rates to fluctuate. The monetary base and the money multiplier ultimately determine
the money supply.
• In most countries, the size of the monetary base is determined by the central bank.
The monetary base includes vault reserves as well as currency in circulation outside
of banks.
• Central banks may alter reserve requirements in order to alter the monetary base.
Monetary policy has an effect on the money supply as well.
• Expansionary policy raises the total supply of money in the economy faster than
usual, while contractionary policy raises the total supply of money more slowly than
usual.
• Expansionary policies are used to combat unemployment, whereas contractionary
policies are used to slow inflation.

➢ Conclusion-
• The demand for money is the amount of money that is held under various motives.
• It should be remembered that in economics, demand for money refers to the
demand for the existing stock of money that is available to be held. It is a stock of
money, not a flow of it over time.
• The supply of money in a country is largely determined by the credit control
policies pursued by the country's banking system.