What is Broad Money To Reserve Money? Definition of Broad Money To Reserve Money, Broad Money To Reserve Money Meaning


The currency in circulation in the economy thus goes up by Rs. 5, an item that shows up on the liabilityside of RBI’s Balance sheet. The value of the acquired asset, also equal to Rs. 5, is entered under the appropriate head on the Assets side. Similarly, the RBI acquires debt bonds or securities issued by the government and pays the government by issuing currency.

  • Reserve Bank of India uses four alternative measures of money supply called as M1, M2, M3, and M4.
  • However, its response to the company’s economic health is based on the amount of this physical money the country holds.
  • It generally includes demand deposits at commercial banks, and any monies held in easily accessible accounts.

According to the research, the European Union is the leading economy in terms of narrow money. Other economies that hold a significant amount of coins and physical notes are Japan and China. America and Germany are in the fourth and fifth positions on the list of the economies with the largest stock of this physical money. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply. Money serves as unit of account or a measure of value. Money is the measuring rod, i.e., it is the unit in which the values of other goods and services are measured in terms of money and expressed accordingly.

The term broad money is used to describe M2, M3 or M4, depending on the local practice. In fact, a great deal of debate is still going on as to what constitutes money supply. 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. Similarly, fixed deposits in commercial banks is not counted as money. M1and M2are known as narrow money whereas M3and M4are known as broad money.

In the United States, narrow money is classified as M1 (M0 + demand accounts). In the United Kingdom, M0 is referenced as narrow money. In a common man’s parlance, money means currency notes and coins used for payments in retail transactions. Apart from above said portable money , we also use cheques demand drafts, debit cards and credit cards as money equivalents. M4 includes total deposits of the post offices and not just deposits in post office savings accounts. But you should not get confused by so many kinds of “M». For all practical purposes, M1 and M3 are most commonly used as indicators of the increase or decrease in money supply.

Johnson has classified definition of money into narrow definition and broad definition. Give narrow definition and broad definition of money. A fall in the exchange rate that reduces the value of a currency in terms of other currencies is called ______. West Bengal Public Service Commission has released the detailed WBCS Notification.Candidates can apply from 28th February 2023. The prelims is expected to take place in June 2023 or later.

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.

Among these measures, M1is the most commonly used measure of money supply because its components are regarded as most liquid assets. ‘Direct exchange of goods against goods without use of money is called barter exchange’. Alternatively economic exchanges without the medium of money are referred to as barter exchanges. An economy based on barter exchange (i.e., exchange of goods for goods) is called C.C. Economy, i.e., commodity for commodity exchange economy. In such an economy, a person gives his surplus goods and gets in return the goods he needs.

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However, its response to the company’s economic health is based on the amount of this physical money the country holds. With that being said, narrow money and Broad Money are often used to determine the financial health of an economy. The first example was a liquid transaction involving notes or coins, but the second case involved demand deposits and required a short time to encash. Broad money is a concept for measuring how much money circulates in an economy. This is the widest measure of money supply that is used by the RBI.

State-run banks will within two weeks submit to the government a detailed scenario-mapped plan of various business risks, people familiar with the development told ET. They will also outline a communication strategy to deal with any exigency, they said. These measures are in decreasing order of liquidity.M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. You can read more about the old monetary aggregates in the ClearIAS article on the money supply.

What is fiat money,?

It facilitates exchange of goods and services and helps in carrying on trade smoothly. The present highly complicated economic system will not exist without money. Explain ‘standard of deferred payment function’ of money. The shoemaker wants a loaf in exchange of his shoes but exchange value of a piece of loaf is but a fraction of a pair of shoes. Shoes cannot be sub-divided without destroying their values. Similarly, if a person wants to purchase cloth equal to the value of the half his cow, he cannot do so Without killing his cow.

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Supply of Money – Definition, Explanation and FAQs

India’s deposits with IMF, World bank, Foreign Government etc. We also know that RBI’s job is to control inflation, by controlling money supply through quantitative and qualitative tools- Repo, MSF, LAF etc. Demand Deposits can be withdrawn on demand from banks. By submitting this form I authorize Fincash.com to call/SMS/email me about its products and I accept the terms of Privacy Policy and Terms & Conditions. Since the end of March, 2020 currency held by the public increased by 8.2%.


The full-bodied currency coins are of little value today under the current currency system. The token coins represent the value of 50 paise and 25 paise. Note- Post offices have no facility for the opening of current accounts. The types of accounts that can be opened are – Savings account, Fixed deposit, and Recurring deposit. In this article, aspirants can find information related to the money supply in an economy. Money Supply is CBSE Class 12 Economics’ most important topic.

Theory, EduRev gives you an ample number of questions to practice What is narrow money and broad money? Tests, examples and also practice Humanities/Arts tests. Very often, the money supply in the economy is represented using a monetary aggregate called ‘broad money’, also denoted as M3.

Here, the term ‘public’ means those who make actual use of money, that is, households, firms and institutions. The government and the banking system are not a part of it because they produce money. Cash reserves held by them do not come into the circulation process. The wheel of money supply that runs our economy comes in different sizes. Right from M1, M2, M3 to M4 and, in some countries, even M8.

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Going back to history, there are various forms in which money was accepted in different countries or cultures. In those times, eatables like salt, rice, cereals and others, stones, and coins of gold, silver, and copper were considered as money. It is similar to currency and coins in possession of the public since people readily accept it as a means of payment. Also, this measure is the most stable out of all the others since it includes fewer liquid components. Therefore M1 from narrow money and M2 from broad money cant jointly create M3 because,M3 itself from broad money.

The circulating which type of money is called broad money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets. Which consists of M1 plus post office savings bank deposits. 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. The majority of people in rural and urban India have preference for post office deposits from the safety viewpoint than bank deposits.

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From 1977, RBI has been publishing four monetary aggregates – M1, M2, M3 and M4 – besides the reserve money. Monetary aggregates are the measures of the money supply in a country. Reserve Bank of India assesses money supply in to our economy on the yardstick of broad money M3.

It issues loans to https://1investing.in/ banks in a similar fashion. Money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Now, that may prompt you to ask what we mean by currency in circulation.


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L3 – L2 + + Public deposits of non-banking financial companies. In India, Reserve Bank of India , measures the money supply and publishes it on a weekly or fortnight basis. Call money rate is the rate at which short term funds are borrowed and lent in the money market. The notation M2 is called ‘Near Money’ or broad money as per local practice. Money Supply can be estimated as narrow or broad money.

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