- 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.
Topics
Introduction to Macro Economics
- Limitations of Macroeconomics
- Economy and Its Types
- Economic Systems
- Macroeconomics
- Circular Flow of Income
National Income
- Concept of National Income
- Income Method
- Importance of National Income Analysis
- National Income and Social Accounting
Theories of Employment and Income
- The Concept of Full Employment
- Types of Unemployment
- Classical Theory of Employment
- Keynes's View on Full Employment
- Comparison of Classicism and Keynesianism
Consumption and Investment Functions
- Introduction to Consumption and Investment Functions
- Consumption
- Investment
- Multiplier
- The Accelerator Principle
- Super Multiplier: (K and β Interaction)
Monetary Economics
- Monetary Economics
- Concept of Money
- Supply of Money
- Quantity Theories of Money
- Inflation
- Meaning of Deflation, Disinflation and Stagflation
- Trade Cycle
Banking
- Banking
- The Historical Development of Banks in India
- Commercial Banks
- Non-banking Financial Institution (NBFI)
- Central Bank
- The Agricultural Refinance Development Corporation (ARDC)
- Regional Rural Banks (RRBs)
- National Bank for Agriculture and Rural Development (NABARD)
- Reserve Bank of India and Industrial Finance
- Monetary Policy
- Recent Advancements in Banking Sector
- Capital Market
- Demonetisation
International Economics
- Introduction to International Economics
- Meaning of International Economics
- Subject Matter of International Economics
- Concept of Trade
- Theories of International Trade
- Gains from International Trade
- Terms of Trade
- Balance of Trade Vs Balance of Payments
- Exchange Rate
- Foreign Direct Investment (FDI) and Trade
International Economic Organisations
- Introduction to International Economic Organisations
- International Monetary Fund (IMF)
- World Bank
- World Trade Organisation (WTO)
- Trade Blocks
- South Asian Association for Regional Co-operation (SAARC)
- Association of South East Asian Nations (ASEAN)
- BRICS
Fiscal Economics
- Introduction to Fiscal Economics
- Public Finance
- Subject Matter / Scope of Public Finance
- Difference Between Public Finance and Private Finance
- Functions of Modern State
- Structure of Public Finance > Public Expenditure
- Types of Taxes
- Structure of Public Finance > Public Debt
- Budget
- Federal Finance
- History of Finance Commission
- Local Finance
Environmental Economics
- Introduction to Environmental Economics
- Meaning of Environment
- Linkage Between Economy and Environment
- Environmental Quality
- Pollution
- Climate Change
- e-wastes
- Concept of Sustainable Development
- Green Initiatives
- Types of Farming in India > Organic Farming
- Tree Plantation
- Seed Ball
Economics of Development and Planning
- Meaning of Development and Underdevelopment
- Difference Between Economic Growth and Economic Development
- Measurement of Economic Development
- Determinants of Economic Development
- Economic and Non-economic Factors
- Causes of Poverty
- Types of Planning
- NITI Aayog (National Institution for Transforming India)
Introduction to Statistical Methods and Econometrics
- Etymology and Milestones of Statistics in Global Level
- Evolution of Statistics in India
- Definitions of Statistics
- Characteristics and Functions of Statistics
- Nature of Statistics
- Scope of Statistics for Economics
- Limitations of Statistics
- Types of Statistics
- Data
- Standard Deviation
- Correlation
- Regression
- Introduction to Econometrics
- Official Statistics
Estimated time: 19 minutes
- Introduction
- Components of Money Supply
- Narrow vs Broad Definition of Money
- Measures of Money Supply in India
- High-powered Money
- New Measures (V.K. Reddy Committee)
- Key Points: Supply of Money
CISCE: Class 12
Introduction
Supply of money refers to the total stock of money held by the public in a country at a point in time, used both as a means of payment and a store of value.
Two Essential Rules
- Rule 1 — "Public" excludes: the Government, the Central Bank (RBI), and Commercial Banks. Money held in government treasuries, RBI vaults, or bank reserves is not counted because it is not in active circulation and including it would cause double-counting.
- Rule 2 — Stock concept: Money supply is always measured at a specific point in time (e.g., money in circulation in India on 1 January 2026), not over a period.
CISCE: Class 12
Components of Money Supply
Money supply has two main components:
A. Currency Component
- Both are fiat money — they carry value by government order (fiat), not because of intrinsic worth
- Both are legal tender — no person can legally refuse to accept them in settlement of a debt
India vs USA: Currency makes up ~50% of India's total money supply, compared with ~18% in the USA — reflecting lower banking penetration and banking habits in India.
B. Deposit Component (Bank Money / Demand Deposits)
- Demand deposits are funds held by the public with commercial banks, withdrawable on demand via cheques
- Also called bank money or chequable deposits
- Convenient and safe for making exact payments
- NOT legal tender — a person may legally refuse a cheque and insist on cash payment
Analogy: Your bank account balance works like money because people trust banks. But unlike cash, no one is legally forced to accept your cheque.
CISCE: Class 12
Narrow vs Broad Definition of Money
| Feature | Narrow Money | Broad Money |
|---|---|---|
| Function stressed | Medium of exchange | Store of value + Medium of exchange |
| Assets included | Highly liquid assets only | Also includes time deposits |
| Measures | M₁, M₂ | M₃, M₄ |
| Key proponent | Traditional economists | Milton Friedman and monetarists |
CISCE: Class 12
Measures of Money Supply in India
The Reserve Bank of India (RBI) uses four official measures: M₁, M₂, M₃, and M₄, differing in liquidity (how easily an asset converts to cash) and rate of return.
| Measure | Formula | Components Added | Liquidity |
|---|---|---|---|
| M₁ | C + DD + OD | Base measure | Highest |
| M₂ | M₁ + SD | Post Office savings deposits | High |
| M₃ | M₁ + TD | Time deposits with commercial banks | Moderate |
| M₄ | M₃ + TDP | Total Post Office deposits (excl. NSC) | Lowest |
| M₀ | Currency in circulation + Banks' deposits with RBI + Other RBI deposits | High-Powered Money | (Reserve money) |
CISCE: Class 12
High-Powered Money
High-powered money is the total money issued by the central bank (RBI). It forms the foundation upon which the entire money supply is built.
M0 = Currency in Circulation + Commercial Banks’ Deposits with RBI + Other Deposits with RBI
Why "High-Powered"?
Because ₹1 of central bank money creates more than ₹1 in total money supply, through the money multiplier effect.
Analogy: High-powered money is like yeast in bread dough — a small quantity of yeast causes the entire loaf to rise far beyond its original size. A small increase in M₀ leads to a multiplied increase in total money supply.
Components of M₀
CISCE: Class 12
New Measures (V.K. Reddy Committee)
In recent years, the RBI adopted revised measures of money supply as recommended by the V.K. Reddy Committee. The revised framework introduces M₀ (high-powered money) as a formal measure and redefines M₁ through M₃ with updated components. The key addition is M₀ — the monetary base — which underpins all other measures.
CISCE: Class 12
