Q. Which of the following types of money supply comes under the definition of narrow money?

[A] M1 and M3

[B] M1 and M2

[C] M2 and M3

[D] M3 and M4

Answer: B

Explanation: RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.

They are defined as follows

  • M1 = CU + DD
  • M2 = M1 + Savings deposits with Post Office savings banks
  • M3 = M1 + Net time deposits of commercial banks
  • M4 = M3 + Total deposits with Post Office savings organizations (excluding National Savings Certificates)

Where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.

  • The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply.
  • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
  • M1 and M2 are known as narrow money.
  • M3 and M4 are known as broad money.

Source: NCERT – Macro economics