- Money supply = the public's stock of money at a point in time; excludes government, RBI, and bank holdings.
- Two components: Currency (fiat money, legal tender) and Demand Deposits (bank money, not legal tender).
- RBI uses 4 measures: M₁ (narrowest, most liquid) → M₂ → M₃ → M₄ (broadest, least liquid).
- M₁ captures money purely as a medium of exchange; M₃ adds the store-of-value dimension (time deposits).
- M₃ is the most widely monitored by the RBI and macroeconomic policymakers.
- High-Powered Money (M₀) is the foundation — a small increase in M₀ leads to a multiplied increase in total money supply via the money multiplier.
- India's currency share (~50%) in the money supply is far higher than in developed countries like the USA (~18%), reflecting lower banking penetration.
Definitions [1]
Definitions: Money
- Prof. Crowther: "Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and store of value."
- Prof. Walker: "Money is what money does" (Shows money is defined by its functions).
- Robertson: "anything which is widely accepted in payments for goods or in discharge of other kinds of business obligations.”
- “Anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.” — Dr. Kent
- G.D.H. Cole: "Money is anything which is habitually and widely used as a means of payment and is generally accepted in the settlement of debts.”
Key Points
Key Points: Concept of Money
- Money eliminates barter system problems by providing a common medium of exchange.
- Three main functions: medium of exchange, measure of value, store of value.
- Must be generally acceptable to function as money.
- Modern economy completely depends on money for smooth transactions.
- Digital payments are the newest evolution in money's history.
Key Points: Supply of Money
Key Points: Inflation
- Inflation = persistent + appreciable + general rise in prices — all three must be present.
- A 2–3% annual inflation is healthy; it becomes a problem only when excessive.
- Demand-Pull Inflation = too much demand; too little supply → prices rise.
- Cost-Push Inflation = rising costs (wages/oil/monopoly power) → producers raise prices.
- Three sub-types of cost-push: wage-push, profit-push, and supply shock (oil shock).
- The inflation rate measures the % increase in average prices year over year.
