16 Money is a matter of functions four,

a medium, a measure, a standard and a store

Money and Money Multiplier

Biswa Swarup Misra

In this session, we look for the answers to
these questions:
Define money and discuss its four functions.

Discuss the definitions of the money supply

used in India
Explain how banks create money.

What is the value of the Money Multiplier

Discuss the three policy tools the Central

Banks uses to manage the money supply.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 1

 What Is Money and Why Do We Need It?

Money Assets that people are generally willing

to accept in exchange for goods and services or
for payment of debts.

Asset Anything of value owned by a person or a

firm.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 2

What Money Is, and Why It’s Important
Without money, trade would require barter, the exchange
of one good or service for another.
1. Every transaction would require a double coincidence
of wants - the unlikely occurrence that two people each
have a good the other wants
wants.
2. Most people would have to spend time searching for
others to trade with - a huge waste of resources.
3. This searching is unnecessary with money, the set of
assets that p
people
p regularly
g y use to buy
ygg&s from other
people.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 3

The 2 Kinds of Money

Commodity money:
takes the form of a commodityy
with intrinsic value
Examples: gold coins,
cigarettes
i tt ini POW camps

Fiat money:
money without intrinsic value,
used as money because of
govt decree
Example:
E ample the U
U.S.
S dollar
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 4
 What Is Money and Why Do We Need It?
Barter and the Invention of Money

Commodity money A good used as money that also has

value independent of its use as money.

The Functions of Money

Anything used as money-whether a deerskin, a cowrie seashell,
cigarettes or a dollar bill-should
cigarettes, bill should fulfill the following four
functions:
• Medium of exchange
• Unit of account
• Store of value
• Standard of deferred payment
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 5
 What Is Money and Why Do We Need It?
The Functions of Money
Medium of Exchange
Money serves as a medium of exchange when sellers are
willing to accept it in exchange for goods or services.

U it off Account
Unit A t

In a barter system, each good has many prices.

Store of Value
Money allows value to be stored easily: If you do not use
all y
your accumulated dollars to buy
y goods
g and services
today, you can hold the rest to use in the future.
Standard of Deferred Payment
Money is useful because it can serve as a standard of
deferred payment in borrowing and lending.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 6
 What Is Money and Why Do We Need It?
What Can Serve as Money?
Five criteria make a good suitable to use as a medium of exchange:

1 The g
good must be acceptable
p to ((that is,, usable
by) most people.
2 It should be of standardized quality so that any
two units are identical.
3 It should be durable so that value is not lost by
spoilage.
4 It should be valuable relative to its weight so that
amounts large enough to be useful in trade can be
easily transported.
5 Th
The medium
di off exchange
h should
h ld be
b divisible
di i ibl
because different goods are valued differently.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 7
 Money without a Government? The Strange
Case of the Iraqi Dinar
Many Iraqis continued to use currency with Saddam’s picture on it, even
after he was forced from power.

Iraqi Govt. thrown out by US troops in April 2003.

April 2003- 4000 dinars =1$ . However, in mid May 1500 dinars=1$
By Jan 2004
2004, 2bn paper dinars were distributed to banks and Saddam Dinars disappeared
disappeared.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 8

What is Legal Tender?
 The coins shall be legal tender in payment or on account
i.e. provided that a coin has not been defaced and has not
lost weight so as to be less than such weight as may be
prescribed in its case: -
((a)) coin of anyy denomination not lower than one rupee
p shall
be legal tender for any sum,
(b) half rupee coin shall be legal tender for any sum not
exceeding
di tten rupees,
(c) any other coin shall be legal tender for any sum not
exceeding one rupee
One Rupee notes are also legal tender and included in the
expression Rupee coin for all the purposes of the Reserve
Bank of India Act, 1934.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 9
 What is Legal Tender?

 Every banknote issued by Reserve Bank of India (Rs.2,

Rs.5,
Rs 5 Rs
Rs.10,
10 Rs
Rs.20,
20 RsRs.50,
50 Rs
Rs.100,
100 Rs
Rs.500
500 and
Rs.1000) shall be legal tender at any place in India in
payment or on account for the amount expressed
therein, and shall be guaranteed by the Central
Government, subject to provisions of sub-section (2)
Act, 1934.
Section 26 of RBI Act

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 10

 What is the Meaning of
"I Promise to Pay"
y Clause?
 As per Section 26 of Reserve Bank of India Act, 1934,
the Bank is liable to pay the value of banknote
banknote. This is
payable on demand by RBI, being the issuer. The Bank's
obligation to pay the value of banknote does not arise
out of a contract but out of statutory provisions.
 The promissory clause printed on the banknotes i.e., "I
promise to pay the bearer an amount of X" is a
statement which means that the banknote is a legal
tender for X amount
amount. The obligation on the part of the
RBI is to exchange a banknote for coins of an
equivalent amount.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 11

The Money Supply

 The money supply (or money stock):

the quantity of money available in the economy
 What assets should be considered part of the
money supply? Two candidates:
 Currency: the paper bills and coins in
th h
the hands
d off th
the ((non-bank)
b k) public
bli
 Demand deposits: balances in bank
accounts that depositors can access on
demand by y writing
g a check
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 12
 Banks’ role in the money supply

 The money supply equals currency plus

demand (checking account) deposits:
M = C + D
 Since the money supply includes demand
deposits, the banking system plays an
important role.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 13

 A Few preliminaries: Bank Reserves
 Reserves:
R Th deposits
The d it that
th t the
th bbanks
k hhave received
i d
but not lent out
 In a fractional reserve banking system
system,
banks keep a fraction of deposits as reserves, and use
the rest to make loans.
 The RBI/Fed stipulates reserve requirements,
regulations on the minimum amount of reserves that
banks must hold against
g deposits.
p
 Banks may hold more than this minimum amount
if they choose.
 The reserve ratio, rr
 = fraction of deposits that banks hold as reserves
 = total reserves as a percentage of total deposits
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 14
 Bank T-account
 T-account: a simplified accounting statement
that shows a bank’s assets & liabilities.
 Example: FIRST NATIONAL BANK
Assets Liabilities
Reserves $ 10 Deposits $100
Loans $ 90

 Banks’ liabilities include deposits,

p ,
assets include loans & reserves.
 In this example,
example notice that rr = $10/$100 =
10%.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 15
Banks and the Money Supply: An Example
Suppose Rs./($)100 of currency is in circulation.
To determine banks’
banks impact on money supply
supply,
we calculate the money supply in 3 different cases:
 1.No
1 No banking system
 2.100% reserve banking system:
banks hold 100% of deposits as reserves,
make no loans
 3.Fractional reserve banking system

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 16

Banks and the Money Supply: An Example
CASE 1: no banking system
Public holds the $100 as currency.
currency
Money supply = $100.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 17

Banks and the Money Supply: An Example
CASE 2: 100% reserve banking system
All deposits are held as reserves, none lent.
Public deposits the $100 at First National Bank (FNB).
FNB holds
FIRST
S NATIONAL
O BANK
100% off
deposit Assets Liabilities
as reserves: Reserves $100 Deposits $100
Loans $ 0
Moneyy supply
pp y
= currency + deposits = $0 + $100 = $100
In a 100% reserve banking g system,
y ,
banks do not affect size of money supply.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 18
Banks and the Money Supply: An Example
CASE 3: fractional reserve banking system
Suppose rr = 10%. FNB loans all but 10%
of the deposit:
FIRST
S NATIONAL
O BANK
Assets Liabilities
Reserves 10 Deposits
$100 $100
Loans $ 90
0

Money supply = $190 (!!!)

depositors have $100 in deposits,
borrowers have $90 in currency.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 19
Banks and the Money Supply: An Example
CASE 3: fractional reserve banking system

How did the money supply suddenly grow?

When banks make loans, theyy create money.
y
The borrower gets
 $90 in currency (an asset counted in the
money supply)
 $90 in new debt (a liability)
A fractional reserve banking system
creates money, but not wealth.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 20

 Banks and the Money Supply: An Example
CASE 3: fractional reserve banking system
Suppose borrower deposits the $90 at Second
National Bank (SNB).

Initially, SNB’s
Initially SNB s SECOND
S CO NATIONAL
O BANK
T-account Assets Liabilities
looks like this: Reserves 9 Deposits
$ 90 $ 90
Loans $ 81
0

If rr = 10% for SNB, it will loan all but 10% of the

deposit.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 21

 Banks and the Money Supply: An Example
CASE 3: fractional reserve banking system
The borrower deposits the $81 at Third National
Bank (TNB).

Initially, TNB
Initially TNB’ss THIRD NATIONAL
O BANK
T-account Assets Liabilities
looks like this: Reserves $ $8
8.10
10
81 Deposits $ 81
Loans $72.90
$ 0

If rr = 10% for TNB, it will loan all but 10% of the

deposit.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 22

 Banks and the Money Supply: An Example
CASE 3: fractional reserve banking system
The process continues, and money is created with
each new loan.
Original
g deposit
p = $ 100.00 In this
FNB lending = $ 90.00 example,
$100 of
SNB lending
l di = $ 81.00
81 00 reserves
TNB lending = $ 72.90 generate
.. .. $1000 of
. .
money.
Total money supply = $1000.00

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 23

 The Deposit
p Multiplier
p
 Deposit multiplier: the amount of money the
banking
b ki system
t generates
t with
ith each
hddollar
ll off
reserves
 The deposit multiplier equals 1/rr.
 In our example,
p ,
rr = 10%
deposit multiplier = 1/rr = 10
$100 of reserves creates $1000 of money

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 24

 Money creation in the banking
system
t

A fractional reserve banking system creates

money,y but it doesn’t create wealth:
Bank loans give borrowers some new money
and an equal amount of new debt
debt.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 25

A C T I V E L E A R N I N G 1:
Exercise
While cleaning your apartment, you look under the sofa
cushion find a $50 bill
You deposit the bill in your checking account.
Th Fed’s
The F d’ reserve requirement
i t iis 20% off deposits.
d it
A. What is the maximum amount that the
money supplyl could
ld iincrease?
?
B. What is the minimum amount that the
money supply could increase?

26
A C T I V E L E A R N I N G 1:
Answers
You deposit $50 in your checking account.
A. What is the maximum amount that the
money supply could increase?
If banks hold no excess reserves, then
money multiplier = 1/rr = 1/0.2 = 5
The maximum possible increase in deposits is
5 x $50 = $250
But money supply also includes currency,
which falls by $50.
Hence, max increase in money supply = $200.
27
A C T I V E L E A R N I N G 1:
Answers
You deposit $50 in your checking account.
A. What is the maximum amount that the
money supply could increase?
A
Answer: $200
B. What is the minimum amount that the
money supplyl could
ld iincrease?
?
Answer: $0
If your bank makes no loans from your deposit,
currency falls by $50, deposits increase by $50,
money supply l remains
i unchanged.
h d
28
 A model of the money
y supply
pp y
exogenous variables

 Monetary base, B = C + R
controlled by the central bank

 Reserve-deposit ratio, rr = R/D

depends on regulations & bank policies

 Currency-deposit
y p ratio,, cr = C/D
depends on households’ preferences

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 29

 Solving
g for the money
y supply:
pp y
C D
M  C D  B  m B
B
where
C D
m 
B


C D

C D   D D 

cr  1
C R C D   R D  cr  rr

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 30

 The money multiplier

cr  1
M  m B, where m 
cr  rr
 If rr < 1, then m > 1
 If monetary base changes by B,
then M = m  B
 m is the money multiplier,
the iincrease iin th
th the money supply
l
resulting from a one-dollar increase
in the monetary base.
base
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 31
 Exercise
cr  1
M  m B, where m 
cr  rr

Suppose households decide to hold more of

their money as currency and less in the form of
demand deposits
deposits.
1. Determine impact on money supply.
2. Explain the intuition for your result.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 32

 Solution to exercise
Impact of an increase in the currency-deposit ratio
cr > 0.
1. An increase in cr increases the denominator
of m proportionally more than the numerator.
So m falls, causing M to fall.
2 If households deposit less of their money
2. money,
then banks can’t make as many loans,
g system
so the banking y won’t be able to
“create” as much money.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 33

 Why y control M
y the Fed can’t precisely
p
cr  1
M  m  B , where m 
cr  rr
 Households can change cr,
causing m and M to change.
 Banks often hold excess reserves
(reserves above the reserve requirement).
If banks change their excess reserves,
then rr, m, and M change.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 34

The Monetary Base, the Money Multiplier, and the
Money Supply in the United States
States-2009
2009

slide 35
CASE STUDY: Bank failures in the 1930s

 From 1929 to 1933,

 Over 9,000 banks closed.
 Money supply fell 28%
28%.
 This drop in the money supply may have caused
the Great Depression
Depression.
It certainly contributed to the severity of the
Depression.
Depression

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 36

 CASE STUDY: Bank failures in the 1930s

cr  1
M  m B, where m 
cr  rr
 Loss of confidence in banks
 cr  m
 Banks became more cautious
 rr  m

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 37

 The money multiplier during the
Great Depression
p
 The money multiplier is usually fairly stable, but
it fell sharply in the Great Depression
 The decline in the multiplier was due to bank
panics which affected the multiplier in two ways
panics,
 People became mistrustful of banks and
increased the currency-deposit ratio
 Banks held more reserves, in anticipation of
bank runs
runs, which raised the reserve-deposit
ratio

slide 38
 CASE STUDY: Bank failures in the 1930s

August 1929 March 1933 % change

M 26.5 19.0 –28.3%
C 3.9 5.5 41.0
D 22.6 13.5 –40.3
B 7.1 8.4 18.3
C 3.9 5.5 41.0
R 3.2 2.9 –9.4
m 3.7 2.3 –37.8
rr 0.14 0.21 50.0
cr 0.17 0.41 141.2
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 39
The currency-deposit ratio and the reserve-deposit
ratio in the Great Depression

Source: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960: Currency—Table A-1, column (1); deposits,
total commercial banks (demand and time)—Table A-1, column (4); bank reserves—Table A-2, column (3).
slide 40
 CASE STUDY: Bank failures in the 1930s

 Even though the monetary base grew

20% from March 1930 to March 1933 1933,
the money supply fell 35%
 As a result, the price level fell sharply
(nearly one-third)
one third) and there was a
decline in output (though attributing the
drop in output to the decline in the
money supply is controversial)

slide 41
Monetary Variables in the Great Depression

Source: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960: Currency—Table A-1, column (1); deposits, total
commercial banks (demand and time)—Table A-1, column (4); bank reserves—Table A-2, column (3); base = currency + reserves; money multiplier =
(currency + deposits)/base; money = currency + deposits. slide 42
 Could this happen
pp again?
g
 Many policies have been implemented since the
1930 tto preventt such
1930s h widespread
id dbbank
k ffailures.
il
 E.g., Federal Deposit Insurance,
to prevent bank runs and large swings in the
currency-deposit ratio.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 43

 Money Multiplier during the Financial Crisis of 2008
 The money multiplier during the financial crisis of 2008
 The worldwide financial panic in fall 2008 caused
the money multiplier to decline sharply, especially
because of a sharp rise in the reserve-deposit ratio
 Banks wanted to hold more reserves because the
Fed began paying interest on reserves and because
the Fed increased the monetary base significantly
and banks had few good lending opportunities
 Despite the sharp decline in the money multiplier,
the
h money supply l increased
d because
b the
h Fedd
significantly increased the monetary base by more
than the decline in the money multiplier
slide 44
The currency-deposit ratio and the reserve-deposit
ratio,, 2007–2009

Source: Authors’ calculations based on data from Federal Reserve Bank of St. Louis FRED database at research.stlouisfed.org/fred2; variables are
currency—CURRSL, deposits—M2SL – CURRSL; reserves—ADJRESSL.

slide 45
Monetary variables in the financial crisis of 2008

Source: Authors’ calculations based on data from Federal Reserve Bank of St. Louis FRED database at research.stlouisfed.org/fred2; variables are
currency—CURRSL, deposits—M2SL – CURRSL; reserves—ADJRESSL.

slide 46
 Three instruments of
monetary
t policy
li

1 Open-market
1. Open market operations
2. Reserve requirements

3. The discount rate

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 47

 Open-market operations
 definition:
The ppurchase or sale of g
government bonds by
y
the Federal Reserve.
 how it works:
If Fed buys bonds from the public,
it pays with new dollars, increasing B and
therefore M.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 48

 Reserve requirements
 definition:
Fed regulations
g that require
q banks to hold a
minimum reserve-deposit ratio.
 how it works:
Reserve requirements affect rr and m:
If Fed reduces reserve requirements,
q ,
then banks can make more loans and
“create” more money from each deposit.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 49

The discount rate
 definition:
The interest rate that the Fed charges on loans it
makes to banks.
 how it works:
When banks borrow from the Fed, their reserves
increase, allowing them to make more loans and
“create” more money.
The Fed can increase B byy lowering g the
discount rate to induce banks to borrow more
reserves from the Fed.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 50

 Which instrument is used most often?
 Open-market operations:
most frequently used.
 Changes in reserve requirements:
least frequently used.
 Changes in the discount rate:
largely symbolic.
The Fed is a “lender of last resort,”
does not usuallyy make loans to banks
on demand.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 51

Summary

slide 52
 GDP, M3 and Velocity of Circulation
Component
Components No. 200506 200607 200708 200809 200910 201011 201112 Formula
CurrencyinCirculation 1 429578 504099 590801 691153 799549 949660 1067890
CashwithBanks 2 17454 21244 22390 25703 32056 37820 41300
CurrencywiththePublic 3 412124 482854 568410 665450 767492 911840 1026600 12
'Other'DepositswiththeRBI 4 6869 7496 9054 5570 3839 3650 3060
Bankers'DepositswiththeRBI 5 135511 197295 328447 291275 352299 423510 356290
DemandDeposits 6 407423 477604 578372 588688 717970 722860 700220
TimeDeposits 7 1893104 2342113 2862046 3535105 4113430 4865770 5614200
ReserveMoneyy 8 571958 708890 928302 987998 1155686 1376820 1427240 1+4+5
NarrowMoney 9 826415 967955 1155837 1259707 1489301 1638350 1729870 3+4+6

BroadMoney 10 2719519 3310068 4017882 4794812 5602731 6504120 7344069 3+4+6+7

ReserveswithRBI 11 142380 204791 337501 296845 356138 427160 359350 4+5
M3basedMoneyMultiplier 12 4.8 4.7 4.3 4.9 4.8 4.7 5.1 10/8
M1basedMoneyMultiplier 13 1.4 1.4 1.2 1.3 1.3 1.2 1.2 9/8
GDPatMarketPrices 14 3693369 4294706 4987090 5630063 6457352 7674148 8855797
Velocity of Circulation wrt M3
VelocityofCirculationwrtM3 15 1.4 1.3 1.2 1.2 1.2 1.2 1.2 14/12
VelocityofCirculationwrtM1 16 4.5 4.4 4.3 4.5 4.3 4.7 5.1 14/9

Sessions 16 IS-LM Model Biswa Swarup Misra slide 70

Sessions 16 IS-LM Model Biswa Swarup Misra slide 71
 Money Multiplier for India

Components ComponentNo. 200506 200607 200708 200809 200910 201011 201112

CurrencyinCirculation 1 429578 504099 590801 691153 799549 949660 1067890
CashwithBanks 2 17454 21244 22390 25703 32056 37820 41300
CurrencywiththePublic 3 412124 482854 568410 665450 767492 911840 1026600
'Other'DepositswiththeRBI 4 6869 7496 9054 5570 3839 3650 3060
Bankers'DepositswiththeRBI 5 135511 197295 328447 291275 352299 423510 356290
DemandDeposits 6 407423 477604 578372 588688 717970 722860 700220
Ti D i
TimeDeposits 7 1893104 2342113 2862046 3535105 4113430 4865770 5614200
ReserveMoney 8 571958 708890 928302 987998 1155686 1376820 1427240
NarrowMoney 9 826415 967955 1155837 1259707 1489301 1638350 1729870

BroadMoney 10 2719519 3310068 4017882 4794812 5602731 6504120 7344069

ReserveswithRBI 142380 204791 337501 296845 356138 427160 359350
M3 based Money Multiplier
M3basedMoneyMultiplier 48
4.8 47
4.7 43
4.3 49
4.9 48
4.8 47
4.7 51
5.1
M1basedMoneyMultiplier 1.4 1.4 1.2 1.3 1.3 1.2 1.2
Sessions 16 IS-LM Model Biswa Swarup Misraslide 54
 Money Multiplier for India
Component
Components No. 200506 200607 200708 200809 200910 201011 201112 Formula
Currency in Circulation
CurrencyinCirculation 1 429578 504099 590801 691153 799549 949660 1067890
CashwithBanks 2 17454 21244 22390 25703 32056 37820 41300
CurrencywiththePublic 3 412124 482854 568410 665450 767492 911840 1026600 12
'Other'
Other DepositswiththeRBI
Deposits with the RBI 4 6869 7496 9054 5570 3839 3650 3060
Bankers'DepositswiththeRBI 5 135511 197295 328447 291275 352299 423510 356290
DemandDeposits 6 407423 477604 578372 588688 717970 722860 700220
Time Deposits
TimeDeposits 7 1893104 2342113 2862046 3535105 4113430 4865770 5614200
ReserveMoney 8 571958 708890 928302 987998 1155686 1376820 1427240 1+4+5
NarrowMoney 9 826415 967955 1155837 1259707 1489301 1638350 1729870 3+4+6

BroadMoney 10 2719519 3310068 4017882 4794812 5602731 6504120 7344069 3+4+6+7

ReserveswithRBI 142380 204791 337501 296845 356138 427160 359350 4+5
M3basedMoneyMultiplier 4.8 4.7 4.3 4.9 4.8 4.7 5.1 10/8
M1basedMoneyMultiplier 1.4 1.4 1.2 1.3 1.3 1.2 1.2 9/8

Sessions 16 IS-LM Model Biswa Swarup Misra

slide 55
 Monetary Aggregates -India
 H=Mo = Currency in Circulation + Bankers' Deposits with
the RBI + 'Other' Deposits with the RBI - Compiled Weekly
-High
High Powered Money
 M1= Currency with the Public + Demand Deposits with the
Banking
g System
y + 'Other' Deposits with the RBI
 M2 = MI· + Time Liabilities Portion of Savings Deposits
with the Banking System + Certificates of Deposit is-sued
by Banks + Term Deposits with a contractual maturity of
up to and including one year with the Banking System
 M3 = M2 + Term Deposits with a contractual maturity of
over one year with the Banking System + Call borrowings
from 'Non-Depository' Financial Corporations by the
Banking System.
Session 16 Money and Money Multiplier Biswa Swarup Misra slide 53
 Liquidity Aggregates
Monthly compilation
 L1, = M3 + All Deposits with the Post Office Savings
Banks (excluding National Savings Certificates).
 L2 = L1 + Term Deposits with Term Lending
IInstitutions
tit ti and
d Refinancing
R fi i I tit ti
Institutions (FI ) + Term
(FIs) T
borrowing by FIs + Certificates of Deposit issued by
FIs.
Quarterly Compilation.
 L3 = L2 + Public Deposits of Non-Banking
Non Banking Financial
Companies.

Session 16 Money and Money Multiplier Biswa Swarup Misra slide 54