The second measure of money supply is M 2 which consists of M 1 plus post office savings bank deposits. Again it needs to be noted that like difference between stock and supply of a commodity total stock of money is different from total supply of money.
Commercial Bank: Savings deposits of post offices are not a part of money supply because they do not serve as medium of exchange due to lack of cheque facility. The fourth measure of money supply is M 4 which consists of M 3 plus total post office deposits comprising time deposits and demand deposits as well.
In practice, M 1 is widely used as measure of money supply which is also called aggregate monetary resources of the society. It is on the estimates of increase in M 3 that the effects of money supply on prices and growth of national income are estimated. In other words, money held by its users and not producers in spendable form at a point of time is termed as money supply.
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Among these measures M 1 is the most commonly used measure of money supply because its components are regarded most liquid assets. Briefly money supply is the stock of money in circulation on a specific day. Supply of money is only that part of total stock of money which is held by the public at a particular point of time. Image Courtesy: In fact is an empirical measure of money supply in India, as is the practice in developed countries.
Similarly, fixed deposits in commercial banks are not counted as money. Theory of Money Supply: The RBI characterizes as narrow money.
Since savings bank deposits of commercial and cooperative banks are included in the money supply, it is essential to include post office savings bank deposits. All the above four measures represent different degrees of liquidity, with M 4 being the most liquid and M4 is being the least liquid.
The stock of money held by government and the banking system are not included because they are suppliers or producers of money and cash balances held by them are not in actual circulation. You must be logged in to post a comment. The RBI calls M 3 as broad money.