Friday, 30 December 2016

What is the Money supply, Reserve money & Money stock?

Hello Readers. Here is the basic concept about Money supply, Reserve money & Money stock for your knowledge. You learn some advance and extra knowledge for your Bank Exams Banking Awareness & Bank Interview preparation.

Below you know about m1 money, m1 m2 m3 m4 measures of money supply and money stock.

What is the Money supply, Reserve money & Money stock?
When RBI calculates money supply in country on the basis of narrow money & broad money for Narrow money it uses symbol like;

M1 which means, currency & coins in inclusion + demand deposits of banks + other deposits with the RBI government IDBI etc.
M2 = M1 + post office saving deposits
M3 is called broad money = M1 +timed deposits of banks
M4 = M3+ total post office deposits

Reserve money is money created by the central bank of the country also called HF-powered money which is actually the base of monetary expansion in country. Currency and coins in circulation +cash in hands with banks + cash reserves in hand of RBI+ other deposits with RBI.

(A) M1 includes
  • Currency with public
  • Demand deposit in all banks (e.g. current account, savings account)
  • Other deposits with RBI

  • India’s deposits with IMF, World bank, Foreign Government etc.
  • Interbank deposits

(B) 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.

(C) M3 (Broad Money)
also called Money aggregate

  • M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits).
  • MIND IT: M3= M1+time and NOT M3=M2+time.

(D) M4
  • M4= M3 + total post office deposits.*
  • *meaning those Post Office “time deposits” and “recurring deposits” also. But excludes national savings certificate etc.
What is reserve money?
There are different forms of money supply – reserve money, narrow money, broad money etc. But the most important indicator of all these is reserve money. It is also called as high powered money, base money and central bank money. Money multiplier shows the mechanism by which reserve money creates money supply in the economy.

Reserve money = Currency in Circulation + Bankers’ Deposits with RBI + ‘Other’ Deposits with RBI

Reserve money holds the topmost position in the RBI’s monetary policy.

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