Followers

Sep 18, 2014

[Economics] Money Supply - M0-M4

Economics

Money Calculation



Measurement of money supply in India:

Upto 1967 
Just “M” = money with public + junta’s demand deposits in banks. (Current account and savings account)
Upto 1977 
Aggregate monetary resource (AMR)
* Coins and currency
* Time Deposits (e.g. Fixed deposit, recurring deposits)
* Demand deposits (Current account and savings account)
From 1977 onwards     
present system M0, M1, M2, M3, M4

M0: Reserve money
·        M0 is the base for creating Broad money supply (M3).
·        M0 = Reserve money = High powered money.
·        M0 is the sum of following components:
(i)  Currency in circulation
(ii) Bankers’ Deposits with RBI
(iii) ‘Other’ deposits with RBI

M1: Narrow Money

Inclusion and exclusion in M1
Includes
Excludes
(1) Currency with Public
(2) Demand deposits in all banks (current account, saving account)
(3) Other deposits with RBI
* India’s deposits with IMF, World Bank, foreign Govts etc
* Interbank deposits

M2
·        M2= M1 + Post office bank savings*
·        *Similar to regular banks, Post office also offers their time savings account, recurring deposit account, time deposit account. Here we count the Post office savings (=demand deposit type) only.

M3 (Broad Money)
·        also called Money aggregate
·        M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits).
M4
·        M4= M3 + total post office deposits.*
·        *meaning those Post Office “time deposits” and “recurring deposits” also. But excludes national savings certificate etc.


 Liquidity and Ranking of Money:

Name
Type
Liquidity [how quickly you can get ‘Value’ into cash]
M1
Narrow Money
Highest
M2
Narrow Money
Less than M1
M3
Broad Money
Less then M2
M4
Broad Money
Lowest liquidity

Money multiplier
·        It is the ratio of Broad money (M3) divided by Reserve Money (M0)
·        Therefore, Broad money (M3) = Reserve Money (M0) x money multiplier
·        In other words, when Reserve money increases, Broad money will also increase. (Direct correlation).

============================================

No comments:

Post a Comment