Unit-2: Concepts of Money Supply

Chapter: 08
Unit-2: Concepts of Money Supply

A) Multiple Choice Questions:

1) Economic stability implies that the supply of money at any time should be
maintained at _____ level:
a) Minimum c) Optimum
b) Maximum d) None
2) The term money supply denotes the total quantity of money available _________:
a) To people in an economy c) To businesspersons of an economy
b) To public sector of an economy d) All
3) Supply of money is ____ concept:
a) Stock c) Real flow
b) Flow d) Both a & b
4) CASA system in bank implies:
a) Current account available for people
b) Recurring deposit account available for people
c) Savings account available for people
d) Current account & savings account available for people
5) The empirical interpretation of money supply is important because:
a) It provides fiscal policy.
b) It gives true picture of money multiplier.
c) It provides deeper understanding of causes of inflation.
d) It provides deeper understanding of causes of growth.
6) The empirical interpretation of money supply is important because:
a) It provides monetary policy.
b) It gives true picture of stock of money.
c) It provides consistency of stock of money with inflation.
d) It provides deeper understanding of causes of Business cycle.
7) The currency issued by RBI is the _____ of central bank & government:
a) Liability c) Both a & b

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b) Asset. d) None
8) “The RBI is empowered to issue currency to any extent by keeping only a certain
reserve of gold & other assets”: It is known as:
a) Minimum statutory reserve c) Minimum reserve system
b) Minimum liability system d) Minimum cash reserve.
9) The first major source of money supply in economy is:
a) Flow of fund by people c) Commercial bank
b) Central bank d) Both b & c.
10) In India coins are issued by:
a) SBI c) Ministry of finance
b) RBI d) All
11) Reserve money is also known as
a) Central Bank Money c) High - powered money
b) Base money d) All
12) M1 + Net time deposits of bank is referred to:
a) M2 c) M4
b) M3 d) None
13) Money measure M2 comprises of:
a) M1 plus time deposits of all banks
b) M1 plus saving deposit with post office saving banks.
c) M1 plus NSC
d) M1 plus time deposits of the banks & saving of post office.
14) M3 consists of:
a) M1 c) Time Deposits
b) M2 d) Both a & c
15) Which one of the following measures of money supply is considered narrow concept
of money supply?
a) M1 c) M3
b) M2 d) M4
16) Which of the following is generally referred to as a ‘broader’ measure of money
supply?
a) Currency in circulation c) Time Deposit
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b) Demand Deposit d) None

17) Which of the following will not come under narrow money?
a) Currency in circulation c) Time Deposit
b) Demand deposit d) None
18) The basic distinction between narrow & broad money is the:
a) Treatment of post-office deposits c) Treatment of saving deposits
b) Treatment of time deposits d) Treatment currency
19) Choose the correct statement from the following:
a) Money is deemed as something held by the public and therefore only currency
held by the public is included in money supply
b) Money is deemed as something held by the public and therefore inter-bank
deposits are included in money supply
c) Since inter-bank deposits are not held by the public, therefore inter-bank
deposits are excluded from the measure of money supply
d) Both a) and c) above
20) Reserve Money is composed of:
a) Currency in circulation + demand deposits of banks (Current and Saving
accounts) + Other deposits with the RBI.
b) Currency in circulation + Banker’s deposits with the RBI + Other deposits with
the RBI
c) Currency in circulation + demand deposits of banks + Other deposits with the
RBI
d) Currency in circulation + demand and time deposits of banks + other deposits
with the RBI
21) M1 is the sum of:
a) Currency and coins with the people + demand deposits of banks (Current and
Saving accounts) + other deposits of the RBI.
b) Currency and coins with the people + demand and time deposits of banks
(Currency and Saving accounts) + other deposits of the RBI.
c) Currency in circulation + Banker’s deposits with the RBI + Other deposits with
the RBI
d) None of the above
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22)Under the ‘minimum reserve system’ the central bank is:

a) Empowered to issue currency to any extent by keeping an equivalent reserve of
gold and foreign securities.
b) Empowered to issue currency to any extent by keeping only a certain minimum
reserve of gold and foreign securities.
c) Empowered to issue currency in proportion to the reserve money by keeping only
a minimum reserve of gold and foreign securities.
d) Empowered to issue currency to any extent by keeping a reserve of gold and
foreign securities to the extent of 350 crores.
23)The primary source of money supply in all countries is:
a) The Reserve Bank of India c) The Bank of England
b) The Central bank of the country d) The Federal Reserve
24)The supply of money in an economy depends on:
a) The decision of the central bank based on the authority conferred on it
b) The decision of the central bank and the supply responses of the commercial
banking system
c) The decision of the central bank in respect of high-powered money
d) Both a & c.
25) Banks in the country are required to maintain deposits with the central bank:
a) To provide necessary reserves for the functioning of the central bank.
b) To meet the demand for money.
c) To meet the central bank prescribed reserve requirements & to meet settlement
obligations.
d) To meet the money needs for the day to day working of the commercial banks.
26)If the behaviour of the public & the commercial banks is constant, then:
a) The total supply of nominal money in the economy will vary directly with the
supply of the nominal high-powered money issued by the central bank.
b) The total supply of nominal money in the economy will vary directly with the
interest rate & inversely with reserve money.
c) The total supply of nominal money in the economy will vary inversely with the
supply of high-powered money.
d) All of the above.
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27) The interest that could have been earned on securities or loans by commercial bank
if it had chosen to invest, increases then opportunity cost of holding excess reserves
will :
a) Increase c) Remains same
b) Decrease d) None
28) The term public is defined to include all economic units (households, firms,
institutions) except producers of money, i.e., _____ & ______:
a) Government: Banking system c) Commercial bank: Development
bank.
b) Government: LICI. d) All
29)Under the fractional reserve system:
a) The money supply is an increasing function of reserve money (or high powered
money) and the money multiplier
b) The money supply is an decreasing function of reserve money (or high powered
money) and the money multiplier
c) The money supply is an increasing function of reserve money (or high-powered
money) and a decreasing function of money multiplier.
d) None of the above as the determinants of money supply are different.
30) The money multiplier and the money supply are:
a) Positively related to the excess reserve ratio α.
b) Negatively related to the excess reserve ratio α
c) Not related to the excess reserve ratio α
d) Proportional to the excess reserve ratio α
31) The currency ratio represents:
a) The behaviour of central bank in the issue of currency
b) The behaviour of central bank in respect cash reserve ratio
c) The behaviour of the public
d) The behaviour of commercial banks in the country.
32)The size of the money multiplier is determined by:
a) The currency ratio β of the public
b) The required reserve ratio at the central bank
c) The excess reserve ratio (α) of commercial banks
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d) All the above

33)_______tells us how much new money will be created by the banking system for a
given increase in the high-powered money:
a) The currency ratio c) The credit multiplier
b) The excess reserve ratio (α) d) The currency ratio(β)
34)The money multiplier will be large:
a) For higher currency ratio (β), lower required reserve ratio (r) and lower excess
reserve ratio (α)
b) For constant currency ratio (β), higher required reserve ratio (r), and excess
reserve ratio (α)
c) For lower currency ratio (β), lower required reserve ratio (r) and lower excess
reserve ratio (α)
d) None of the above
35) The ratio that relates the change in the money supply to a given change in monetary
base is called the:
a) Required reserve ratio c) Deposit ratio
b) Money multiplier d) Discount rate
36)For a given level of the monetary base, an increase in the required reserve ratio will
denote:
a) A decrease in the money supply c) An increase in demand deposits
b) An increase in the money supply d) Nothing precise can be said
37) For a given level of the monetary base, an increase in the currency ratio causes the
money multiplier to --------------- and the money supply to --------.
a) Decrease; increase c) Decrease; decrease
b) Increase; decrease d) Increase; increase
38) If commercial banks reduce their holdings of excess reserves:
a) The monetary base increases c) The money supply increases.
b) The monetary base falls d) The money supply falls.
β +1
39)In money multiplier m = : β stands for:
β+α
a) Currency deposit ratio
b) CDR
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c) Ratio of money held by the public in currency to that they held in banks.
d) All
β +1
40) In money multiplier m = : α stands for:
β+α
a) Reserve deposit ratio
b) RDR
c) Proportion of total deposits that the commercial banks keep as reserve.
d) All
41) High powered money is equal to:
a) Money supplied by the RBI only
b) Total supply of money in economy
c) Notes & coins held by the people
d) Notes & coins held by the people as well as cash reserves of the commercial
banks.
42)The deposit multiplier & money multiplier are not identical as:
a) Banks do not lend out all available money but instead maintain reserves at a level
above the minimum required reserve.
b) Banks do lend out all available money & maintain reserves at a level above the
minimum required reserve.
c) Banks do not lend out all available money but instead maintain less reserves at a
level below the minimum required reserve.
d) Banks do not lend out all available money but instead maintain no reserves at a
level above the minimum required reserve.
43)The effect of an open market sale is very similar to that of open market purchase, but
in the _____ direction:
a) Proportionate c) Opposite
b) Direct d) No
44) How much money is kept as fixed deposits compared to demand deposits is known
as:
a) Currency deposit ratio c) Demand deposit ratio
b) Time deposit ratio d) All.

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45)When interest rate is too low & the banks prefer to hold the newly injected reserves
as excess reserves with no risk attached to it, value of money multiplier is:
a) One c) Zero
b) Infinite d) None

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B) Short Answer Type: (Marks 2)

1) Define money supply.

2) A curb on high-powered money will lead to a curb on the creation of credit by the
commercial banks in the economy. Do you agree?
3) Which is the most liquid measure of money supply?
4) Which is the least liquid measure of money supply?
5) Explain the nature of currency issue under minimum reserve system.
6) Define ‘credit money’.
7) List the components of M1
8) Distinguish between M1 and M2
9) Define ‘Reserve money’
10) Describe the term CRR.
11) What do you mean by the liquidity aggregates compiled by RBI
12) Define ‘money multiplier’
13) What is the nature of relationship between money multiplier and money supply?
14) What would be the effect on money multiplier if banks hold excess reserves?
15) What effect does government expenditure have on money supply?
16) What is the value of money multiplier in a system of 100% reserve banking?
17) What is a credit multiplier?

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C) Application based Questions:

1) Compute Reserve Money from the following data published by RBI

Components (In billions of rupees) As on 7 July 2017
Currency in Circulation 15428.40
Bankers Deposits with RBI 4596.18
‘Other deposits’ with the RBI 183.80

2) Compute M3 from the following data published by RBI

Components (In billions of rupees) As on 31 March 2017
Currency with the public 12637.1
Demand Deposits with Banks 14,106.3
Time Deposits with Banks 101,489.5
‘Other’ Deposits with Reserve Bank 210.9

3) If the initial deposit in a bank is $1,000, and the reserve requirement is 20%, what is
the maximum potential increase in the money supply through the credit multiplier?
4) What will be the total credit created by the commercial banking system for an initial
deposit of rupees 1000 for the required reserve ratio 0.02, 0.05 and 0.10 percent
respectively? Compute credit multiplier.
5) Calculate Narrow Money(M1) from the following:
1. Currency with public Rs 90000 crore
2. demand deposit with banking system Rs 200000 crore
3. time deposit with banking system Rs 220000 crore
4. other deposit with RBI Rs 280000 Crore
5. saving deposits of post office Savings Bank Rs 60000 Crore

6) Compute credit multiplier if the required reserve ratio is 10% and 12.5% for every
1,00,000 deposited in the banking system. What will be the total credit money
created by the banking system in each case?
7) Calculate currency public from the following data:
1. Notes in circulation 2496611
2. currency of rupee coin 25572

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3. circulation of small coin 743

4. cash on hand with banks 98305

8) Calculate M2 from the following data:

Description Rs in Crores
1. Notes in circulation 2420964
2. circulation of rupee coin 25572
3. circulation of small coin 743
4. post office Savings Bank deposit 141786
5. cash on hand with banks 97563
6. deposit money of the public 1776199
7. demand deposit with banks 1737692
8. other deposits with RBI 38507
9. total post office deposit 14896
10. Time deposits with bank 178694

9) What would be the impact of each of the following on credit multiplier & money
supply? (Nov:2018)
i) If commercial banks keep 100% reserves:
ii) If commercial banks do not keep reserves:
iii) If commercial banks keep excess reserves
10) Compute M1 supply of money from the data given below (May 2019)
a) Currency with public: 2,13,279.8 Crores
b) Time deposits with banks 3,45,000.8 Crores
c) Demand deposits with banks 1,62,374.5 Crores
d) Post office savings deposit 382.9 Crores
e) Other deposits of RBI 765.1 Crores
11) What will be the total credit created by the commercial banking system for an initial
deposit of Rs 3000 at a required Reserve Ratio (RRR) of 0.05 & 0.08 respectively?
Also compute credit multiplier (May:2019)
12) If the required reserve ratio is 10%, currency in circulation is rupees 400 billion,
demand deposits are 1000 billion and excess reserves total rupees 1 billion find out
value of money multiplier.
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13) Compute reserve money from the following data published by RBI: (Nov 2019)
PARTICULARS (₹ in crores)
Net RBI credit to the government 8,51,651
RBI Credit to the commercial sector 2,62,115
RBI’s Claim on Banks 4,10,315
Government’s Currency Liabilities to the Public 1,85,060
RBI’s net foreign assets 72,133
RBI’s net non-monetary liabilities 68,032

14) Compute credit multiplier if the Required Reserve Ratio is 10% and 12.5% for every
₹1,00,000 deposited in the banking system. What will be the total credit money
created by the banking system in each case? (Nov-2019)
15) Compute M3 from the following data: (Nov-2020; exam held on 7th Dec:2020)
Component Rs in crores
Currency with public 2,25,432.6
Demand deposits with banks 3,40,242.4
Time deposits with banks 2,80,736.8
Post office saving deposits 446.7
(Excluding National Savings Deposits)
Other deposits with RBI 392.7
(Including government deposits)
Post Office National Saving Certificate 83.7
Government deposits with RBI 102.5

16) What is the impact of the following on credit multiplier & money supply, if
commercial banks keep? A) Less Reserve) Excess Reserve
(Nov-2020; exam held on 7th Dec:2020)
17) Compute M2 supply of money from the following RBI data.
Item Rs. (In crores)
i. Currency with public 435656.6
ii. Other deposits with Reserve Bank 1234.2
iii. Savings deposit with post office saving banks 647.7

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iv. Net time deposits with banking system 514834.3

v. Demand deposits of Banks 274254.9

(Nov:2020 held on 7thJan, 21)

18) In the context of India measure money supply (M3) as per guidelines published by
RBI. (May 2020 held on July 21)
Item Rs. (In crores)
i. Currency notes & coin with public 24637.20
ii. Demand deposits of Banks 201589.60
iii. Net time deposits with post office savings account 28116.40
iv. Other deposits with Reserve Bank 420.10
v. Savings deposit with post office saving banks 415.25

19)
Particulars Amount in (`) Crore
Notes in Circulation 25,00,000
Circulation of Rupee Coins 26,000
Circulation of Small Coins 850
Cash on hand with Banks 95,000
Bankers' Deposits with RBI 4,500
Other Deposits with RBI 180
Total Post office Deposits 12,000
Time Deposits with Bank 15,000

You are required to compute (December 2021)

i) Currency with the Public; and
ii) Reserve Money.

20) Calculate Narrow Money(M1) from the following information: (December 2021)
Descriptions Rs in Crore
Currency with public 2,80,000
Demand Deposits with banks 4,00,000
Time Deposits with banks 3,40,000

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Other deposits with RBI 5,80,000

Post Office Savings Deposits 90,000

21) Calculate Money Multiplier with the help of following information:

Reserve Ratio (r)= 10%
Currency = 200 billion
Deposits = 400 billion
Excess Reserve = 800 million (December 2021)

22)What will be the total money credit created by the commercial banking system for an
initial deposit of 500 if the required reserve ratio is 0.04, 0.06 and 0.10 percent
respectively. Compute credit multiplier. (Marks 2: May 2022)

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