- 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 [3]
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 widely accepted in payment for goods" (Focuses on exchange function).
- “Anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.” — Dr. Kent
Legal Definition of Money
"Money is anything which has the legal power to act as a medium of exchange and to discharge debt."
Under this definition, only items backed by government authority — currency notes and coins — qualify as money. In the words of Robertson: "Money is anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations."
Functional Definition of Money
Gowther defines money as, "Money is anything that is generally acceptable as a means of exchange and at the same time, acts as a measure and as a store of value".
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.
