Question

Why does the concept of money supply not include money in the treasury of the government and money with the central and commercial banks?

Answer 1

The concept of money supply refers to the total stock of money available to the general public for use in economic transactions at a particular point in time. It includes currency with the public and demand deposits with commercial banks, as these are the forms of money that are actually used for buying goods and services.

1. Money in the Treasury of the Government: Money held in the treasury is not included in the money supply because:
   1. It is not in active circulation in the economy.
   2. It is not available to the public for making transactions.
   3. It represents government reserves or funds, not liquid money used in the market.
2. Money with the Central Bank: Money held by the central bank (e.g., the Reserve Bank of India) is excluded because:
   1. It is high-powered money used for controlling the money supply through instruments like CRR, SLR, and open market operations.
   2. It is not directly accessible to the public or used for daily transactions.
3. Vault Cash with Commercial Banks: Cash held by commercial banks in their vaults is also excluded because:
   1. It is held as a precautionary reserve to meet withdrawal demands.
   2. It is not part of the money that is currently circulating in the hands of the public.