Unit 3- Money Supply and Inflation

1.Explain the functions of Money?

Money is anything which performs the following four functions:
Medium of Exchange
A measure of value
A store of value over time
Standard for deferred payments
2.Explain legal definitions of Narrow and Broad Money?
in circulation among the public at a particular point of time is called money supply. RBI publishes figures for
four alternative measures of money supply, viz. M1, M2, M3 and M4.
They are defined as follows
M1 = Currency + Demand deposit
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 NSC)
where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by
commercial banks.
Demand deposit : Savings and Current Account – Payable on demand.
The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply.
The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded
as part of money supply.
M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These gradations are in
decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
M3 is the most commonly used measure of money supply. It is also known as aggregate monetary
resources.
3.What is mean by inflation?
Meaning: Inflation refers to a situation of increase in the general price level over a period of time. It is a part
of business cycles
4.List out the various types of inflation?
Wholesale Price Index (WPI)
Consumer Price Index (CPI)
Gross Domestic Product (GDP) Deflator
5.What is mean by demand pull inflation?
Demand-pull inflation is a tenet of Keynesian economics that describes the effects of an imbalance in
aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the
aggregate supply, prices go up. . This leads to a steady increase in demand, which means higher prices.
6.What is mean by cost push inflation?
Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and
raw materials. Cost-push inflation can occur when higher costs of production decrease the aggregate
supply (the amount of total production) in the economy.
GDP Deflator GDP deflator is a measure of the level of prices of all new, domestically produced, final
goods and services in an economy

Confidential C