What is an Ideal Supply of Money?

By Mandeep Kumar|Updated : November 4th, 2022

The ideal supply of money is the amount of money 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 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 organisations (excluding National Savings Certificates)

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FAQs related to Ideal Supply of Money

  • Ideal supply of money refers to the money supply which is required to purchase goods and services produced in an economy. The total amount of currency in circulation at any given time is referred to as the money supply.

  • An ideal supply of money does not let inflation or deflation exist in an economy as the money keeps the aggregate demand equal to the aggregate supply.

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