Chapter - 5

• Money is anything that is generally

• accepted as a medium of exchange,

• measure of value,

• store of value,

• and at the same time acts as a standard of deferred payments.

→ It refers to the total volume of money held by the public at a particular
point of time in the economy.
→ It is a stock concept.

→ It includes money held by public only (households and firms only).

• M1 = Currency with Public + Demand Deposits with banks + Other
deposits with RBI.
• Currency and coins with public includes paper notes and coins that are
held by the public at a particular point of time.

• Paper notes include notes of ₹2000, ₹500, ₹200, ₹100, ₹50, ₹20, ₹10
whereas coins include ₹1, ₹2, ₹5 and ₹10.

• It is also known as ‘Fiat Money’ as it is issued by the order from the

government.

• It is also known as ‘Legal Tender Money’ as by law, it is legal tender for

doing transactions.
 Demand deposits
• It refers to the deposits made by the public with the
commercial banks.

• Demand deposits are deposits that are withdraw able

on the demand of the public by issuing cheques.

• It includes current account and savings account

deposits.
 Other deposits with RBI
• It include deposits held by RBI that are made by the
foreign institutions like IMF and the government of
other countries etc.

• However deposits of Indian government and

commercial banks with RBI are not included.

• M1 is also known as transaction money.

• M1 = Currency with Public + Demand Deposits with banks + Other
deposits with RBI.

• M2 = M1 +Saving Deposits with Post Office Saving Banks.

• M3 = M1 + Net time deposits with banks.

• M4 = M3 + Total Deposits with Post Office Saving Banks (excluding NSC).

 Points to Remember

→ Higher you go to the measure of money supply, less is the liquidity. M1 is

the most liquid form of money supply and M4 is the least liquid form of
money supply.

→ M1 and M2 are known as narrow money supply concept, whereas M3 and

M4 are known as broad money supply concepts.