What is an Ideal Supply of Money?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

The Ideal Supply of Money is the amount required to purchase goods and services produced in an economy. It maintains the purchasing power of money, or the aggregate demand for money, in balance with the aggregate supply of money. An ideal money supply shields the economy from inflationary or deflationary pressures.

Ideal Supply of Money

The money supply is the total amount of currency in circulation at any given time. Money supply data is typically recorded by a country’s central bank or a government agency.

The total supply of money and the total stock of money are not the same things. It is only a portion of the total stock of money held by the public at any given time.

The four alternative measures of money supply, according to the RBI, are:

  • M1 = CU + DD (CU is currency (notes plus coins) held by the public, and DD is net demand deposits held by the commercial banks).
  • 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 organizations (excluding National Savings Certificates).

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