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Solved Which of the following is broad money?

time deposits

Well, as you may be aware, our government, mostly through the central bank, prints paper currencies and mints coins that we use as mediums of exchange for all our transactions. But all printed notes and minted coins do not end up in the hands of the public. Some portion of it lies in the vaults of the central bank.

office savings banks

It also counts the demand deposits, the savings, current account deposits and the other deposits of the banks. High powered money – The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money. It consists of currency and deposits held by the Government of India and commercial banks with RBI. If a memeber of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit holders. These items are claims which the general public, government or banks have on RBI and are considered to be the liability of RBI.

Thus, it is conventional to describe a country’s monetary system in terms of its standard money, which serves as the primary source of supply. It should be mentioned that the adoption of a specific monetary standard in a country at a given moment is determined by the country’s economic conditions. The money supply, meaning the total cash present under a nation’s economy, is bound to influence the economics of the market. Therefore, any change in the demand and supply of money will result in a consequent change in the market. Money supply has a major impact on the economy of a country.

Full-bodied money

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Mostly, the transactions include payments through debit cards and checks. Any form of money that can be accessed quickly for monetary transactions will be classified as narrow money. The textbook definition of high-powered money is the sum of currency in circulation with the public and cash reserves held by banks. This is called high-powered money because this forms the base on which money stock is created as a multiple. A part of the monetary base is held by banks as a cash reserve ratio, which is a fraction of the deposits created by the banking system.

Effect of Money Supply on the Economy

In short, the tends to accelerate if more money is available because businesses have easy access to finance. If the system contains less money, the economy slows down, and prices can drop or stall. In this context, broad money is one of the measures used by central bankers to determine what interventions they could introduce, if any, to influence the economy. It does not matter whether you keep your notes ready for use in your wallet or you keep them under your mattress.

  • Clearly, cash and coins are the most liquid forms of money, since they can be used instantaneously and universally used to settle unlimited transactions.
  • Well, as you may be aware, our government, mostly through the central bank, prints paper currencies and mints coins that we use as mediums of exchange for all our transactions.
  • Without a common unit of measure, exchange of goods and services becomes very difficult.
  • Explain the ‘unit of account/measure of value’ function.
  • Federal Reserve, use lower interest rates to increase the money supply when the goal is to stimulate the economy.
  • M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash.

Which consists of M1, plus time deposits with commercial and cooperative banks, excluding interbank time deposits. What makes money supply of utmost importance is the fact that it regulates the growth of an economy. An increase in the money supply brings down the interest rates, which leads to a rise in investments by the people. A decrease in the money supply will have the opposite impact. Thus, its management becomes an essential requirement for achieving economic development and price stability. Analyzing the money supply from time to time helps economists to develop appropriate fiscal policies.

Which of the following is broad money?

So, currency in circulation is that portion of the notes and coins that is in the hands of the public. It is important to note here that the money supply does not include the stock of money held by the government or the money under the possession of the banks. These institutions serve as the suppliers of money or are involved in the production of money rather than being a part of the money supply.

Sir u have specified macro economies and micro economies. Number of times money passes from one hand to another, during given time period. In other words, when Reserve money increases, Broad money will also increase. DD with RBI can be held only by Quasi- Governmental agencies, international agencies, or former Governors of RBI.

The money supply can be increased in an economy by purchasing government securities such as treasury bills and government bonds. Suppose a boy named Rahul, and his friends go out for a trip when they come across an ice cream parlour. He takes out the required cash from his wallet and pays the ice cream store right away in the first case. Supply of money is only that part of total stock of money which is held by the public at a particular point of time. It needs to be noted that total stock of money is different from total supply of money.

money supply includes

At the same time, a corresponding demand or term deposit comes into existence and becomes part of the money supply. So, depositing money in a bank does not lead to either increase or decrease in money supply. The narrow money only includes the currencies and coins that are easily available for commerce. That’s the reason why this money is limited to coins and notes.

To understand the money supply in the economy RBI uses monetary aggregates like M0, M1, M2, M3 etc. Here you were also able to know what are the different measures of the money supply. To get a piece of detailed knowledge about money supply you can visit the Entri app.

The economists worldwide have noticed a strong correlation between the inflationary trend and growth of money in circulation in a point of time. Thus, government which is in principle responsible for currency notes and coins issued by it, is answerable to its citizen get their value by dint of regulation or law. In economics, broad money is a measure of the money supply that includes more than just physical money such as currency and coins . It generally includes demand deposits at commercial banks, and any monies held in easily accessible accounts. Narrow money is a category of money supply that includes all physical money such as coins and currency, demand deposits and other liquid assets held by the central bank.

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This was in keeping with the traditional and Keynesian views of the which type of money is called broad money measure of the money supply. M3 + All deposits with post office savings banks excluding National Saving Certificates . The supply of money, on the other hand, is a different concept. Reserve Bank of India uses four alternative measures of money supply called as M1, M2, M3, and M4.

Its two components are – search cost and disutility of waiting. Remember, search cost is the high cost of searching suitable persons to exchange goods and disutility of waiting refers to time period spent on searching the required person. This ultimately led to evolution of money as medium of exchange. Apart from just cash and coins, money also consists of deposits with the banking system, both interest-free demand deposits and interest-bearing time deposits, such as fixed deposits.

BasisNarrow MoneyBroad MoneyMeaningNarrow money is a part of the money supply that solely comprises the most liquid kind of money the general people own. It includes money in the form of notes, coins, and any deposits in people’s bank accountsThe amount of money flowing in a particular economy is referred to as broad money. It’s the second part of the money supply calculation. That’s because the money held in these accounts are readily available whenever needed. You could use this money for transactions and commerce. Even if the transaction does not involve physical money, such as coins and paper notes, it will be classified as narrow money.

  • From 1977 to 1998, RBI used four monetary aggregates – M1, M2, M3 and M4 – to measure money supply.
  • Due to the decrease in discretionary spending the demand for industrial and manufactured goods also decreased, therefore even the Lenders are not willing to take risks.
  • It issues loans to commercial banks in a similar fashion.
  • The correct answer isM1 + Net time deposits of commercial banks.
  • Mutual funds are going all out to get investors to put money in their debt schemes before March 31, when the tax advantage these products enjoy will come to an end.

Deferred payments are payments which are made sometime in future. Debts are usually expressed in terms of the money of account. The use of money as the standard of deferred or delayed payments immensely simplifies borrowing and lending operations because money maintains a constant value through time.

commercial bank

Measure is a broad concept and is also known as – aggregate monetary resources of the society. The 4 different types of money as classified by the economists are commercial money, fiduciary money, fiat money, commodity money. A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments, but due to the Covid-19 pandemic, the rise was not encouraged either. ______ is the main source of money supply in an economy.

Money, thus, acts as common medium of exchange, a common measure of value, as stamlard of deferred payments and a store of value. Explain the ‘unit of account/measure of value’ function. Mutual funds are going all out to get investors to put money in their debt schemes before March 31, when the tax advantage these products enjoy will come to an end. A trusted mentor and pioneer in online training, Alex’s guidance, strategies, study-materials, and mock-exams have helped many aspirants to become IAS, IPS, and IFS officers.

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