Money Supply
1 Quick Explanation 1–3 min
Money supply is the total stock of money circulating in the economy at a point of time.
It is a stock, measured 'as on a date' — made of currency and bank deposits.
2 Detailed Notes
Definition
Definition
Money supply (M) is the total stock of money in circulation among the public at a point of time. It includes currency with the public and demand deposits with commercial banks.
Formula
Measures (M₁ and M₄ are popular)
M₁ = Currency with public + Demand deposits of commercial banks + Other deposits with RBI
M₂ = M₁ + Savings deposits of post office savings banks
M₃ = M₁ + Net time deposits of banks (broad money)
M₄ = M₃ + Total post office depositsRBI publishes these measures. M₁ is narrow money, M₃ is broad money — the most used in India.
Important
Currency with public
Note: 'currency with public' excludes cash held by banks (their reserves). It is currency held outside banks.
Key idea
Who supplies money?
- RBI issues currency (liability of RBI).
- Commercial banks create demand deposits (credit creation).
- So money supply = currency with public + demand deposits — created jointly by RBI and banks.
Key points
Determinants
- Monetary base (reserve money) set by RBI.
- Cash reserve ratio (CRR) — higher CRR, lower deposit creation.
- Public's preference for cash vs deposits.
In One Minute
Money supply = stock of money with the public = currency + demand deposits. M₁ narrow, M₃ broad. Supplied by RBI (currency) and banks (deposits).
Important for Exam
- ⭐ Money supply is a stock — not a flow.
- ⭐ Components of M₁ (currency + demand deposits + other deposits).
- ⭐ Why banks create money supply (deposits).
- ⭐ Distinguish M₁ vs M₃.
Watch & Learn
Watch on YouTubeMoney - Chapter 5 - Class 12 - One Shot
by Rajat Arora
Why watch? Simple table-based explanation of all measures.
Open on YouTube Watch on YouTubeMoney - Chapter 5 - Class 12 - One Shot
by Rajat Arora
Why watch? Good for concept clarity with real RBI data.
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