Money Supply – Types, Measures, Features, Money Aggregates in India
By BYJU'S Exam Prep
Updated on: November 14th, 2023
Money Supply can be defined as all the currency and other liquid instruments in an economy of a country on the date measured. It includes both cash and deposits of money present in an economy at a certain point in time. Money Supply is also known as money stock. The bank regulators have an impact on the Money Supply available to the public by imposing reserve requirements on the banks, determining how to extend credit, and other money matters.
Money supply, a fundamental concept in macroeconomics and monetary policy, plays a crucial role in shaping an economy’s financial landscape. This article delves into the intricacies of money supply, exploring its types, measures, features, and significance in economic stability and growth.
Table of content
What is Money Supply?
Money Supply is the total amount of money circulating in an economy at a particular point in time. Economics analyzes the Money Supply and develops monetary policies around it. The Money Supply is expressed and measured with the use of different monetary aggregates like M1, M2, M3, M4, etc.
Money Supply Notes
Only highly-liquid forms of money like bank deposits and currency are considered. The analysis is performed by the Private and Public sectors because of the possible impact on Money Supply on the Price level, inflation, and the business cycle.
Types of Money
The types of money can be broadly categorized into three categories: full-bodied money, paper/credit/token money, and representative full-bodied money.
Full-bodied Money
The value of full-bodied money is equivalent to the value of a commodity. It is typically made of precious metals, such as gold or silver, and its value is derived from the metal it contains. Historically, full-bodied money was widely used, but its use has diminished over time.
Paper/Credit/Token Money
The value is more than the value of a commodity. This type of money is not backed by any physical commodity but is instead supported by the issuing authority, such as various types of banks or the government.
Representative Full-bodied money
It is a type of token money and refers to money made of paper. The money value of this money is much higher than its commodity value. In this system, the paper currency or digital representation does not have intrinsic value but is considered legal tender by the government.
Effects of Money Supply on the Economy
With the increase in Money Supply, the interest rate gets lowers, and it puts more money in the hands of the consumer while resulting in spending.
- Due to this scenario, business order more raw materials and increase production. With the increasing business activities, the labor demand also increases.
- The opposite of this can happen if the Money Supply declines.
- The measurement of Money Supply has shown that there is a relationship between price levels and inflation.
- The increase and decrease in the Money Supply influence many parameters of macroeconomics. However, a significant impact can be seen in the inflation and bank rates.
Monetary Aggregates (Measures of Money Supply)
The measurement of the Money Supply is done with the help of Money aggregates. The supply of money is measured by the Reserve Bank of India on a weekly basis in India. There are three types of bank deposits – Current Account, Fixed Deposit, and Recurring Deposit Account.
M1= C + DD + OD (Narrow Money)
- Where C= Currency held by the public
- DD= Demand Deposits with Banks
- OD= Other Deposits
The Demand Deposits (DD) can be withdrawn only on the demand of banks, and Time Deposits (TD) can be withdrawn only after a specific period of time.
- Total Deposits= TD+DD
M1:Is the narrow money because it includes 100% liquid deposits. (Currency with the public + Deposit money of the public)
M2: includes M1 and the saving account deposits with the post offices. M2= M1+ Savings deposits with Post Office saving banks.
M3: Broad Money (M1+TD)
M4: M3+ All deposits with post office savings banks (excluding National Savings Certificates).
The Money Supply in a country can be affected by the central bank of that particular country. Purchasing the government securities such as government bonds and treasury bills can increase the Money Supply in an economy.
However, the reaction would be the opposite when the central bank tightens the Money Supply by selling the securities in an open market. The prices of such securities will fall when there is an increase in the supply, and as a result, the interest rates rise.
Read: What is M1, M2, and M3 Money Supply in India?
Features of Money Supply
The Reserve Bank of India (RBI) measures the money supply in India using four broad money aggregates, known as M0, M1, M2, and M3. These aggregates represent different components of the overall money supply in the economy. The money supply in India is primarily determined by the Reserve Bank of India through its monetary policy measures, such as open market operations, reserve requirements, and interest rate adjustments.
Changes in the money supply have a direct impact on inflation and economic growth. An excessive increase in the money supply can lead to inflationary pressures. RBI regularly publishes data on money supply aggregates, allowing policymakers, economists, and market participants to analyze trends and make informed decisions.
Money Supply in India – Recent Trends
Money Supply M3 of India increased to 210374.43 billion vs 208193.87 INR billion in June. The reason behind this was RBI traded rupees to stop the currency from rising.
- India’s Money Supply(M3) raised 9.9 percent as of June 4th, 2021, and this is due to the fact that India received foreign currency that increased the demand for the rupee.
- As per RBI, the Covid-19 pandemic generated uncertainty, and it has resulted in an increase in Money Supply.
- Higher interest rates can give rise to a lower Money Supply, and when the Money Supply decreases, it becomes more expensive for the consumers to carry debt.
- Money Supply Control
Money Supply UPSC
Money Supply, as a vital concept in economics and monetary policy, holds significant importance in the UPSC GS-3 syllabus. Understanding the dynamics of the Money Supply is crucial for aspirants aiming to grasp the intricacies of macroeconomic analysis and policy formulation. By exploring the components and measurement methods of money supply, candidates can gain insights into the factors influencing economic growth, inflation, and monetary stability. To gain comprehensive knowledge on this topic during the UPSC Mains exam preparation, it is highly recommended to cover the right books and notes.
Money Supply MCQs
Question: Supply of money remaining the same when there is an increase in demand for money, there will be a) a fall in the level of prices b) an increase in the rate of interest c) a decrease in the rate of interest d) an increase in the level of income and employment
Answer: b) an increase in the rate of interest
Question: Which of the following is not a component of the money supply in an economy? a) M1 b) M2 c) M3 d) M4
Answer: c) M3
Question: Which component of the money supply includes currency in circulation and demand deposits with commercial banks? a) M1 b) M2 c) M3 d) M4
Answer: a) M1
