Economics Project

Money Supply
 Meaning and evolution of money
• When wants were not so multiple, goods were
exchanged for goods. This system of exchange
is known as barter system. But with the
multiplicity of wants, barter system proved to
be an inefficient system of exchange. It is then
that man invented money- a thing that was
commonly accepted as a medium of exchange.
 Money Concept
Money defined as a instrument that serves
as :

• a medium of exchange
• a measure of value
• a store of value
• a standard for deferred payments
 The concept of money supply

• Supply of money is a stock concept. It refers to total stock

of money(of all types) held by the people of a country at
a point of time. Supply of money doesn’t include -
1. Stock of money held by the government
2. Stock of the money held by the banking system of a
country
• The government and the banking system of a country are
suppliers or producers of money. Hence, money held by
them is not the part of stock of money held by the
people.
 Measurement Of Money Supply
In India, there are four alternative measures of money supply, popularly known
as M1, M2, M3 and M4.

M1 Measurement

M1 = C + DD +OD

C : it refers to currency and includes coins and paper notes held by

the public

DD : it refers to demand deposits of the people with the

commercial banks. These are chequeable deposits which can be
withdrawn or transferred on demand.
.

Measurement Of Money Supply

OD : other deposits which include demand deposits with RBI of public financial
institutions like IDBI; demand deposits with RBI of foreign central banks and of
the foreign governments; demand deposits of international financial
institutions like IMF and World Bank

Only net demand deposits are included in money supply. Distinction may be
drawn between gross demand deposits and net demand deposits with the
commercial banks. Gross demand deposits include inter-banking claims: claim
of one bank against the other. Net demand deposits do not include inter
banking claims. Inter-banking claims are not the part of demand deposits of the
people
 Measurement Of Money Supply
M2 Measurement
It is a broader concept of the supply of money compared to M1. Besides all
the components of M1, it also includes the savings of the people with the
post offices. Thus,

M2= M1+Deposits with Post Office saving bank account

 Measurement Of Money Supply
M3 Measurement
M3 is also broader concept of money supply compared to M1. Besides
all the components of M1, it includes, (net) time deposits (or fixed
deposits/or term deposits)of the people with the commercial banks.
Thus,
M3=M1 + net time deposits with the commercial banks

M4 Measurement
M4 concept is much broader then M3. Besides all the components of
M3, it also includes total deposits with the post offices (other than in the
form of National Saving Certificate.) Thus,
M4= M3 + Total Deposits with post offices (other than NSC)
 Who supplies money ???
In the modern times, the sources of supply of money are
government, central bank of the country and commercial banks.
In India, it is ministry of finance that issues one-rupee notes and
all the coins.

Money is mainly supplied by the Reserve Bank of India which

is central bank of the country. RBI issues currency on the basis
of minimum reserve system

When the commercial banks provide credit to the people or

buy the securities sold by the RBI then they add to the supply of
money. On other hand when they contract credit, there is fall in
the supply of money.