Question

Reserve Bank of India calculates four components of money supply, $M_1,M_2,M_2,M_4$. Which one of the following statements is not correct?

• A. $M_1=$ currency with public $+$ demand deposits with banks
• B. $M_2=M_1+$ post office savings deposit
• C. $M_3=M_1+M_2$
• D. $M_4=M_3+$ total post office deposits

Answer 1

Answer: (C)

$M_3=M_1+M_2$

Since April $1977$, the RBI has been publishing data on four measures of the money supply which are discussed as under:
1. $M_1$: The first measure of money supply, $M_1$ consists of:
(a) Currency with the public which includes notes and coins of all denominators.
(b) demand deposits with commercial and cooperative banks, excluding inter-bank deposits and
(c) other deposits with RBI.
2. $M_2$: The second measure of money supply is $M_2$ which consists of $M_1$, plus post-office savings bank deposits.
3. $M_3$: The third measure of money supply in India is $M_3$ which consists of $M_1$ plus time deposits with commercial banks and cooperative banks, excluding inter-bank time deposits. The RBI calls $M_3$ as broad money.
4. $M_4$: The fourth measure of money supply is $M_4$ which consists of $M_3$ plus total post office deposits comprising time deposits and demand deposits as well.