- 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
Microeconomic Theory
Demand
- Introduction to Microeconomics and Macroeconomics
- Microeconomics
- Macroeconomics
- Macroeconomics Vs Microeconomics
- Introduction to Demand
- Meaning of Demand
- Features of Demand
- Types of Demand
- Determinants of Demand
- Demand Function
- Quantity Demanded and Demand
- Law of Demand
- Demand Schedule
- Demand Curve
- Individual Demand Curve to Market Demand Curve
- Slope of the Demand Curve
- Linear Demand Curve
- Reasons for the Downward Slope of the Demand Curve
- Importance of the Law of Demand
- Exceptions to the Law of Demand
- Movement Along the Demand Curve
- Change in Demand – Shift in Demand Curve
- Difference Between Extension and Increase in Demand
- Difference Between Contraction and Decrease in Demand
- Cross Price Effects
- Relationship Between Income and Demand
- Impact of Tastes and Preferences on Demand for a Commodity
- Industry Demand Vs Firm Demand
- Concept of Utility
- Cardinal Utility Analysis / Marginal Utility Analysis
- Types of Marginal Utility
- Total Utility and Marginal Utility
- Forms of Utility
- Features of Utility
- Relationship Between Total Utility and Marginal Utility
- Law of Diminishing Marginal Utility
- Exceptions of the Law of Diminishing Marginal Utility
- Importance of the Law of Diminishing Marginal Utility
- Consumer's Equilibrium through Cardinal Utility Approach
- Law of Equi-Marginal Utility
- Exceptions of the Law of Equi-marginal Utility
- Importance of the Law of Equi-marginal Utility
- Ordinal Utility Analysis/Indifference Curve Analysis
- Indifference Schedule
- Indifference Curve
- Indifference Map
- Marginal Rate of Substitution (MRS)
- Assumptions of Indifference Curve Analysis
- Properties of Indifference Curves
- Price Line or Budget Line
- Consumer's Equilibrium through Indifference Curve Approach
- Comparison of Utility Theory and Indifference Curve Theory
- Consumer's Equilibrium through Indifference Curve Approach
- Relationship Between Marginal Rate of Substitution and Marginal Utility
Theory of Income and Employment
- Introduction to Theory of Income and Employment
- Basic Model of Income Determination
- Aggregate Demand and Its Components
- Desired (Ex Ante) and Effective Demand (Ex Post)
- Propensity to Consume or Consumption Function
- Propensity to Save - Saving Function
- Relationship Between Consumption and Saving Functions
- Derivation of Saving Function
- Investment Expenditure
- Private and Public Investment
- Induced and Autonomous Investment
- Determination of Equilibrium Income and Output
- Concept of Aggregate Demand and Aggregate Supply
- Saving-investment Approach
- Investment Multiplier
- Investment Multiplier Defined
- The Multiplier Mechanism
- Graphic Presentation of Multiplier
- Derivation of Multiplier Formula
- Solved Numerical Problems on Propensity to Consume and Save, Equilibrium Income and Multiplier
- Meaning of Full Employment and Voluntary Unemployment
- The Concept of Full Employment
- Voluntary and Involuntary Unemployment
- Excess Demand
- Measures to Correct the Excess Demand
- Deficient Demand
- Measures to Correct Deficient Demand
- Deficient and Excess Demand and Business Cycle
- Aggregate Demand in a Three - Sector Economy
- Features of the Consumption Function
- Shifting of the Consumption Function
- Importance of the Consumption Function
- Gross Investment and Net Investment
- Paradox of Thrift
- Variables
- Partial and General Equilibrium
- Static Analysis
- Comparative Static Analysis
- Dynamic Analysis
- Difference between Static and Dynamic Analysis
- Psychological Law of Propensity to Consume
- Measures to Raise Propensity to Consume
- Importance of Investment
- Static Multiplier
- Dynamic Concept of Multiplier
- Limitations of Multiplier
- Leakages of Multipler
- Importance of Multiplier
- Types of Multiplier
- Balanced-Budget Multiplier
- Unemployment Associated with Full Employment
- Inflationary Gap
- Foreign Trade Policy
Elasticity of Demand
- Introduction to Elasticity of Demand
- Meaning and Types of Elasticity of Demand
- Price Elasticity of Demand
- Classification of Price Elasticity - Degrees of Price Elasticity of Demand
- Methods of Measuring Price Elasticity of Demand
- Percentage or Proportionate Method
- Total Expenditure Method
- Point Method (Geometric Method)
- Arc Elasticity of Demand
- Revenue Method
- Numerical Problems of Price Elasticity of Demand
- Factors Affecting Price Elasticity of Demand
- Importance of Elasticity of Demand
- Income Elasticity of Demand
- Types of Income Elasticity of Demand
- Importance of Income Elasticity
- Cross Elasticity of Demand
- Туpes of Cross Elasticity of Demand
- Limitations of Cross Elasticity of Demand
- Importance of Cross Elasticity of Demand
Money and Banking
- Introduction to Money and Inflation
- Concept of Money
- Features of Money
- Barter system
- Difficulties of Barter System of Exchange
- Evolution of Money
- Qualities of Good Money
- Modern Forms of Money
- Functions of Money
- Primary Functions
- Secondary Functions
- Contingent Functions
- Importance of Money
- Supply of Money
- Measures of Money Supply
- Inflation
- Types of Inflation
- Introduction to Banking System
- Types of Bank
- Functions of Commercial Bank
- Central Bank
- Functions of Central Bank
- Methods of Credit Control by the Central Bank
- Quantitative Methods of Credit Control by the Central Bank
- Qualitative Methods of Credit Control by the Central Bank
- Difference Between the Central Bank and the Commercial Banks
- Role of Banks in the Economy
- Indian Monetary System
- Constitutents of Money Supply
- Reserve Bank of India's Approach of Money Supply
- Factors Affecting Money Supply
- Commercial Banks
- Process of Credit Creation by Commercial Banking System
- Factors Affecting Credit Creation
- High Powered Money
- Classification or Structure of Commercial Banks in India
- Components of Money Supply
- Evolution of Central Bank
- Need for a Central Bank
- Importance of Central Bank
Supply
- Concept of Supply
- Individual and Market Supply
- Distinction Between Supply and Stock
- Determinants of Supply
- Supply Function
- Law of Supply
- Supply Schedule
- Supply Curve
- Derivation of Market Supply Curve From Individual Supply Curves
- Explanation of the Law of Supply
- Time Period and Supply
- Exceptions to the Law of Supply
- Movement Along the Supply Curve Or Expansion and Contraction of Supply
- Shift of the Supply Curve or Change in Supply
- Expansion of Supply and Increase in Supply
- Contraction of Supply and Decrease in Supply
- Elasticity of Supply
- Meaning and Types of Elasticity of Demand
- Price Elasticity of Supply
- Categories (Degrees) of Elasticity of Supply
- Measurement of Elasticity of Supply > Percentage Method
- Measurement of Elasticity of Supply > Geometric or Point Method
- Determinants of Elasticity of Supply
- Importance of Elasticity of Supply
Balance of Payments and Exchange Rate
- Concept of Balance of Payments
- International Linkages
- Open Economy and Its Linkages
- Balance Payment
- Definitions of Balance Payments
- Meaning of Balance of Payments
- Balance of Trade
- Balance of Invisible Trade
- Components of Balance of Payments
- Current Account
- Capital Account
- Categories of Balance of Payments
- Balance of Trade vs Current Account Balance
- Structure of Balance of Payments
- Methods to Measure Balance of Payments
- Capital Account Balance
- Balance of Payments Surplus and Deficit
- Autonomous and Accommodating Items
- Balance of Payments Disequilibrium
- Terms of Trade - Errors and Omissions Excepted (E&OE)
- Causes Behind Unfavourable Bop
- Remedies for Unfavourable Bop
- Monetary and Fiscal Policies to Correct Disequilibrium in the BOP Account
- Fiscal policies
- Foreign Exchange Rate
- Foreign Exchange
- Exchange Rate System
- Demand for Foreign Exchange
- Supply of Foreign Exchange
- Determination of Equilibrium Exchange Rate
- Shifts of the Demand Curve
- Shifts of the Supply Curve
- Advantages of Fixed Exchange Rate
- Disadvantages of Fixed Exchange Rate
- Advantages of Flexible Exchange Rate
- Disadvantages of Flexible Exchange Rate
- Types of Exchange Rate
- Factors Responsible for Exchange Rate Fluctuation
- Some Related Concepts of Exchange Rate
- Difference Between Devaluation and Depreciation
Market Mechanism
- Introduction to Market Mechanism
- Basic Concepts of Equilibrium and Equilibrium Price
- Equilibrium Price and Quantity in a Competitive Market
- Changes in Equilibrium
- Effects of Changes (Shifts) in Demand on Equilibrium Price and Equilibrium Quantity
- Effects of Changes (Shifts) in Supply on Equilibrium Price and Equilibrium Quantity
- Effects of Simultaneous Changes (Shifts) in Demand and Supply
- Some Special Cases of Equilibrium
- Importance of the Element in the Determination of Price
- Applications of Tools of Demand and Supply Price Control
- Mаximum Price Legislation or Price Ceiling and Rationing
- Minimum Price Legislation or Floor Price
- Important Areas of Applications of Tools of Demand and Supply Curves
- Meaning of Perfect Competition
- Assumptions and Conditions of Perfect Competition
- Pure and Perfect Competition
- Time Element in the Theory of Price Determination
- Determination of Equilibrium Prices
- Normal Price and Law of Returns
- Comparison between Market Price and Normal Price
- Practical Applications of Tools of Demand and Supply Analysis
Public Finance
- Introduction to Public Finance
- Public Revenue
- Nature and Significance of Taxes
- Tax and Fee
- Canons of Taxation
- Types of Taxes
- Merits of Direct Taxes
- Demerits of Direct Taxes
- Merits of Indirect Taxes
- Demerits of Indirect Taxes
- Direct Taxes vs Indirect Taxes
- Kinds of Tax System > Proportional tax
- Kinds of Tax System > Progressive Tax
- Kinds of Tax System > Regressive Tax
- Kinds of Tax System > Degressive Tax
- Kinds of Tax System > Digressive Tax
- Sources of Central Government Revenue
- Sources of State Government Revenues
- Value-Added Tax (VAT)
- Modified Value-Added Tax (MODVAT)
- MODVAT to CENVAT
- Public Expenditure
- Reasons for the Growth of Public Expenditures in India for Recent Times
- Importance of Public Expenditure in a Developing Country
- Public Debt
- Structure (Types) of Public Debt
- Reasons Behind Internal Public Debt
- Reasons Behind External Public Debt
- Methods of Redemption of Public Debt
- The Burden of Public Debt
- Main Sources of Internal & External Debt of the Government of India
- Distinction Between Internal Debt and External Debt
- Effects of Government Borrowings on the Indian Economy
- Fiscal Policy
- Objectives of Fiscal Policy
- Role of Fiscal Policy
- Instruments of Fiscal Policy
- Fiscal Measures for Stabilisation
- Effective Role of Fiscal Policy for Underdeveloped or Developing Country
- Limitations of Fiscal Policy
- Role of Fiscal Policy to Control Inflationary Situation
- Deficit Financing
- Reason for Deficit Financing
- Effects of Deficit Financing
- Limits of Deficit Financing
- Introduction to Budget
- Government Budget
- Need and Importance of Government Budget
- Objectives of Government Budget
- Types of Government Budget in India
- Modern Classification of Budget
- Balanced and Unbalanced Budget
- Unbalanced/Deficit - Surplus Budget
- Zero-Base Budgeting (ZBB)
- Zero-Base Budgeting in India
- Components (Structure) of the Government Budget
- Budget Receipts
- Revenue Receipts
- Tax Receipts
- Non-Tax Receipts
- Capital Receipts
- Budget Expenditure
- Revenue Expenditure and Capital Expenditure
- Plan Expenditure and Non-plan Expenditure
- Budget Deficits
- Budgetary Procedure
- Developmental and Non-developmental Expenditures
- Balanced Budget vs Deficit or Surplud Budget
Concepts of Production
- Concept of Production
- Product
- Factors of Production
- Production Function
- Short-run and Long-run
- Features of Production Function
- Types of Production Functions
- Some Basic Concepts - Total, Average and Marginal Physical Products
- Relationship between Average Product (AP) and Marginal Product (MP)
- Relationship between Total Product (TP) and Marginal Product (MP)
- Returns to a Factor - Laws of Returns to a Variable Factor
- Law of Variable Proportions
- Statement of the Law of Variable Proportions
- Assumptions of the Law of Variable Proportions
- Illustration of the Law of Variable Proportions
- Three Stages of Production
- Explanation of the Law of Variable Proportions
- Stages of Operation and the Decision to Produce
- Conditions Or Causes of Applicability
- Applicability of the Law of Variable Proportions
- Changes in Production
- Returns to a Factor or Law of Returns
- Law of Variable Proportions and Returns to Scale Compared
- Variation of Output in the Long Run - Returns to Scale
- Scale of Production
- Concept of Indivisibility
- Economies of Scale
- Diseconomies of Scale
Cost and Revenue
- Introduction to Cost of Production
- Money Cost Or Accounting Cost / Explicit Cost
- Economic Cost
- Opportunity Cost
- Real Cost
- Private and Social Cost
- Fixed Cost and Variable Cost
- Different Cost Concepts
- Total Cost Curves
- Average Cost Curves
- Marginal Cost (MC)
- Relationship between Average and Marginal Cost
- Long-Run Cost Curves
- Long-run Average Cost (LAC) Curve
- Long-run Marginal Cost (LMC) Curve
- LAC Curve U-shaped - Economies and Diseconomies of Scale
- Numerical Problems Long-run Cost Curves
- Revenue Concepts
- Behaviour of Revenue Under Different Market Structures
- Relationship Between Total, Average and Marginal Revenues Under Perfect Competition
- Relationship Between Total, Average and Marginal Revenue Under Imperfect Competition
- Significance of Revenue Curve
- Numerical Problems of Revenue
National Income
- Concept of National Income
- Вasic Concept about Domestic Territory
- Basic Concepts Related to Domestic Income and National Income
- Net Factor Income from Abroad (NFIA)
- Significance or Importance of National Income
- Circular Flow of Income
- Circular Flow of Income in a Two-Sector Economy
- Circular Flow of Income in a Two-Sector Economy with Savings and Investment
- Circular Flow of Income in a Three-Sector Economy
- Circular Flow of Income in a Four-Sector Economy
- Circular Flow in Open Economy
- Significance of Circular Flow of Income
- Equilibrium of the Flow of National Income Or Injections and Withdrawals
- Nature of Goods and Services
- Economic Goods and Non-Economic Goods
- Material and Non-Material Goods
- Consumer and Producer Goods
- Single-Use (Non-Durable) Goods and Durable Goods
- Intermediate Goods and Final Goods
- Important Concepts of National Income
- Gross Domestic Product
- Gross National Product
- Net Domestic Product
- Net National Product (NNP)
- National Disposable Income
- Net National Income or Product at Factor Cost
- Net Domestic Product or Income at Factor Cost
- Gross Domestic Product or Income at Factor Cost
- Gross National Product at Factor Cost
- Income from Domestic Product Accruing to Private Sector
- Private Income
- Microeconomics > Personal Income
- Basic Concepts of Microeconomics > Personal Disposable Income
- Relationship Between Arious National Income Aggregates
- Per Capita Income
- Real Income
- GDP and Welfare
- Circular Flow of Production, Income and Expenditure
- Methods of Measurement of National Income
- Income Method
- Classification of Factor Income
- Estimation of Factor Income
- Main Precautions in Income Method
- Output Method/Product Method
- Net Product or Value Added Method
- Main Precautions in Product Method
- Expenditure Method
- Measurement of Final Expenditure
- Estimation of National Income
- Main Precautions in Expenditure Method
- Summary of the Three Methods for Measurement of GDP
- Treatment of Items in the Estimation of GNP
- GNP and Economic Welfare
- Difficulties of Measuring National Income in a Less-Developed Economy
- Methods of Measurement of National Income
- Transactions Included in National Income
- Transactions not Included in National Income
Main Market Forms and Equilibrium of a Firm
- Concept of Market
- Market Structure
- Factors Determining Market Forms
- Perfect Competition
- Features of Perfect Competition
- Pure and Perfect Competition
- Monopoly
- Features of Monopoly
- Monopolistic Competition
- Features of Monopolistic Competition
- Oligopoly
- Features of Oligopoly
- Monopsony
- Features of Monopsony
- Duopoly
- Characteristics of Duopoly
- Bilateral Monopoly
- Other Forms of Market
- Factors Determining Market / Extent of Market
- Demand Curves of Firms under Different Market Forms
- Comparison between different forms of market
- Difference Between Imperfect Competition and Monopolistic Competition
- Firm : An Economic Entity
- Profit Maximisation Objective
- The Definition of Profits
- Rules for Profit-Maximisation
- Producer's (Firm's) Equilibrium: Total Revenue and Total Cost Approach
- Producer's (Firm's) Equilibrium: Marginal Revenue and Marginal Cost Approach
- Short-run Equilibrium
- Long-run Equilibrium
- Firm is a Price Taker, Not a Price Maker
- Equilibrium of Industry
- Difference Between Firm and Industry's Equilibrium
- Meaning of a Producer
- Producer's Equilibrium under Perfect Competition
- Determination of Price and Equilibrium Under Monopoly
- Monopoly Equilibrium and Laws of Costs
- Price Discrimination or Discriminating Monopoly
- Price and Output Discrimination Under Discriminating Monopoly
- Measures of Monopoly Power
- Nature of Demand and Cost Curves
- Equilibrium Price and Output under Monopolistic Competition
- Group Equilibrium in Monopolistic Competition
- Product Differentiation
- Selling Costs
- Equilibrium with Selling Costs
- Price and Output Under Oligopoly Indeterminate
- Price and Output Determination under Oligopoly
- Price Rigidity-Sweezy's Kinky Demand Curve Model or Equilibrium under Independent Action
- Reasons for Price Stability
- Cournot's Model
- Collusive Oligopoly
- Mergers
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
