Economics
Money Calculation
Measurement of money supply in India
Upto 1967
|
Just “M” = money with public + junta’s demand
deposits in banks. (Current account and savings account)
|
Upto 1977
|
Aggregate monetary resource (AMR)
* Coins and currency
* Time Deposits (e.g. Fixed deposit, recurring
deposits)
* Demand deposits (Current account and savings
account)
|
From 1977 onwards
|
present system M0, M1, M2, M3, M4
|
M0: Reserve money
·
M0
is the base for creating Broad money supply (M3).
·
M0
= Reserve money = High powered money.
·
M0
is the sum of following components:
(i) Currency in circulation
(ii) Bankers’ Deposits with
RBI
(iii) ‘Other’ deposits with
RBI
M1: Narrow Money
Inclusion and exclusion in M1
|
|
Includes
|
Excludes
|
(1) Currency with Public
(2) Demand deposits in all banks (current account,
saving account)
(3) Other deposits with RBI
|
*
* Interbank deposits
|
M2
·
M2=
M1 + Post office bank savings*
·
*Similar
to regular banks, Post office also offers their time savings account, recurring
deposit account, time deposit account. Here we count the Post office savings (=demand
deposit type) only.
M3 (Broad Money)
·
also
called Money aggregate
·
M3
= M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits).
M4
·
M4=
M3 + total post office deposits.*
·
*meaning
those Post Office “time deposits” and “recurring deposits” also. But excludes
national savings certificate etc.
Liquidity and Ranking of Money:
Name
|
Type
|
Liquidity [how quickly you can get ‘Value’ into cash]
|
M1
|
Narrow Money
|
Highest
|
M2
|
Narrow Money
|
Less than M1
|
M3
|
Broad Money
|
Less then M2
|
M4
|
Broad Money
|
Lowest liquidity
|
Money multiplier
·
It
is the ratio of Broad money (M3) divided by Reserve Money (M0)
·
Therefore,
Broad money (M3) = Reserve Money (M0) x money multiplier
·
In
other words, when Reserve money increases, Broad money will also increase. (Direct
correlation).
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