Q.An economy reports the following figures for a given date: Currency with the public = ₹4,000 crore; Demand deposits with banks = ₹2,500 crore; Other deposits with the RBI = ₹100 crore; Time deposits with banks = ₹6,000 crore. Calculate M1 and M3.
Concept understanding — Money Supply and Its Measures
Money supply is the total stock of money held by the public at a point in time. The RBI measures it through four progressively wider aggregates: M1 (currency with the public + demand deposits + other RBI deposits, the narrowest and most liquid, called narrow money), M2 (M1 + post office savings deposits), M3 (M1 + time deposits with banks, called broad money and the aggregate most used in policy), and M4 (M3 + other post office deposits). The size of money supply is shaped by RBI policy, bank credit creation, government spending, and foreign exchange flows.
M1 adds only the most liquid components of money supply; M3 additionally brings in time deposits.
M1 = 4,000 + 2,500 + 100 = ₹6,600 crore; M3 = M1 + 6,000 = ₹12,600 crore.
M1 = ₹6,600 crore; M3 = ₹12,600 crore.
Step 1 — Compute M1.
M1=Currency with public+Demand deposits+Other RBI deposits
M1=4000+2500+100=₹6,600 crore
Step 2 — Compute M3.
M3=M1+Time deposits with banks
M3=6600+6000=₹12,600 crore
M1 = ₹6,600 crore (narrow money); M3 = ₹12,600 crore (broad money).
Cross-check by adding the components in a different order. Grouping the two 'immediately spendable' items first: (4000 + 2500) = 6500, plus the smaller 'other deposits' figure of 100, gives 6600 for M1 — the same total regardless of the order the components are added in, since addition is commutative. Adding time deposits (6000) to this confirmed M1 again gives 12,600 for M3, matching Step 2.
Adding time deposits into M1 (which would wrongly conflate narrow and broad money), or forgetting the small 'other deposits with the RBI' component altogether — even though it is usually the smallest figure, the formula for M1 explicitly includes it.
- CBSE 2024Set ANNUAL2 marksQ.Write a short note on: Near Money
›Reveal solutionSolution
Near money refers to liquid financial assets that can be readily converted into cash but are not themselves used directly as money.
Explanation
Near money means those assets which are close substitutes for money because they can be converted into cash quickly and with little or no loss of value, yet they do not serve directly as a medium of exchange. Examples include bills of exchange, government bonds, treasury bills, fixed and time deposits, and shares and debentures. Such assets possess a high degree of liquidity (nearness to money), which is why they are called near money. They are important because people hold wealth in these forms to earn income while keeping it easily convertible into cash.
✓Final answerNear money refers to highly liquid financial assets — bills of exchange, bonds, treasury bills, fixed deposits, shares — which can be converted into cash quickly with little loss of value but are not themselves used directly as a medium of exchange.
- CBSE 2024Set ANNUAL2 marksQ.Write a short note on: Liquidity
›Reveal solutionSolution
Liquidity is the degree to which an asset can be converted into cash quickly and without loss of value; money is the most liquid asset.
Explanation
Liquidity refers to the quality of an asset of being easily and quickly convertible into cash without any loss of its value. Money (cash) possesses perfect liquidity because it is itself a ready and generally accepted means of payment. Other assets differ in their liquidity: a savings deposit or a treasury bill is highly liquid, while assets like land or buildings are much less liquid because they take time to sell and may be sold at a loss. People prefer to hold a part of their wealth in liquid form so as to meet unexpected needs — this desire is called liquidity preference.
✓Final answerLiquidity means the ease and speed with which an asset can be converted into cash without loss of value; money is the most liquid asset, while assets like land and buildings have low liquidity.
- CBSE 2023Set ANNUAL2 marksQ.Write a short note on: Liquidity
›Reveal solutionSolution
Liquidity is the quality of an asset of being easily and quickly convertible into cash without loss of value. Money (cash) is perfectly liquid; near-money assets like bank deposits are highly liquid; and assets like land and buildings are the least liquid.
Meaning
Liquidity refers to the degree to which an asset can be converted into cash quickly and without loss of value. An asset is said to be liquid if it can be turned into money easily, speedily and at its full worth.
Explanation
Assets differ in their degree of liquidity:
- Cash (currency and coins) is the most liquid asset, because it is money itself and is accepted everywhere immediately.
- Demand deposits and savings deposits in banks are highly liquid, as they can be withdrawn quickly; they are called near money.
- Shares, bonds and fixed deposits are less liquid, because converting them into cash takes some time and may involve a cost.
- Land, buildings and machinery are the least liquid assets, since selling them takes a long time and may involve loss.
Liquidity is important because people and businesses need ready cash to meet their day-to-day transactions and unexpected payments. This desire to hold assets in liquid (cash) form is what Keynes called liquidity preference.
✓Final answerLiquidity means the ease and quickness with which an asset can be converted into cash without loss of value; cash is the most liquid asset, bank deposits (near money) are highly liquid, and assets such as land and buildings are the least liquid.
- CBSE 2023Set ANNUAL2 marksQ.Write a short note on: Near Money
›Reveal solutionSolution
Near money consists of highly liquid financial assets that are not legal money but can be readily converted into cash with little loss of value, such as time deposits, savings deposits, bills of exchange and bonds. They serve as a store of value but are not directly a medium of exchange.
Meaning
Near money refers to assets which are close substitutes for money because they are highly liquid, that is, they can be converted into cash quickly and with little or no loss of value. However, they are not money in the strict sense, because they cannot be directly used as a medium of exchange to make payments.
Examples and features
Common examples of near money include:
- time (fixed) deposits and savings deposits with banks,
- bills of exchange,
- government bonds and securities, and
- treasury bills.
The features of near money are:
- it is highly liquid, though slightly less liquid than cash;
- it performs the store-of-value function of money well;
- it earns some income, such as interest, unlike cash; but
- it must first be converted into money before it can be used to buy goods and services.
Thus near money lies between fully liquid cash and less liquid real assets, and it is important in the study of money supply.
✓Final answerNear money refers to highly liquid financial assets, such as time and savings deposits, bills of exchange, bonds and treasury bills, that can be converted into cash quickly and with little loss of value; they act as a store of value but are not money themselves and cannot be directly used as a medium of exchange.
- CBSE 2020Set ANNUAL2 marksQ.Write a short note on: Currency
›Reveal solutionSolution
Currency is the stock of paper notes and coins issued by the central bank and the government which serves as legal tender and circulates as cash in the economy. It forms the currency component of the money supply held by the public.
Meaning
Currency is money in the form of paper notes and metallic coins that is in actual circulation in a country. In India, currency notes are issued by the Reserve Bank of India and coins and one-rupee notes are issued by the Government of India.
- Currency is legal tender, which means it must be accepted in payment of debts and dues.
- It is the most liquid form of money and is used by people for day-to-day transactions.
- In the measurement of money supply, currency with the public (notes and coins held by people, excluding cash with banks and the government) is an important component.
This concept in the AP Intermediate 1st-year Economics course aligns with the money-and-banking content of the NCERT/CBSE curriculum.
✓Final answerCurrency is the paper notes and coins issued by the central bank and the government that circulate as legal tender; the currency held by the public is a key component of the money supply.
- CBSE 2019Set ANNUAL2 marksQ.Write a short note on: Near money
›Reveal solutionSolution
Near money means financial assets that are not money themselves but are highly liquid and can be converted into money quickly and with little loss of value, such as bonds, bills of exchange, treasury bills and time deposits.
Meaning
Near money refers to assets that are close substitutes for money — they are not money in the strict sense (they cannot be used directly as a medium of exchange), but they are highly liquid and can be easily and quickly converted into cash with little or no loss of value.
Common examples of near money are bills of exchange, government bonds and securities, treasury bills, and time (fixed) deposits. They perform the store-of-value function of money and can be turned into money when needed, but they must first be sold or encashed before they can be spent. Because of their nearness to money they are called near money.
✓Final answerNear money refers to highly liquid financial assets that are not money themselves but can be quickly and easily converted into money with little loss of value — such as bills of exchange, bonds and government securities, treasury bills and time (fixed) deposits. They act as close substitutes for money and perform its store-of-value function.
- CBSE 2019Set ANNUAL2 marksQ.Write a short note on: Currency
›Reveal solutionSolution
Currency means the paper notes and metallic coins in circulation that act as legal tender money in a country. In India it comprises the currency notes issued by the RBI and the coins and one-rupee notes issued by the Government, and it forms a major part of the money supply.
Meaning
Currency refers to the paper notes and metallic coins that are in actual circulation in a country and are accepted as money for all transactions. It is the physical form of money that people carry and use in day-to-day dealings.
Currency is legal tender, which means that by law it must be accepted in payment of debts and obligations. In India:
- currency notes (except the one-rupee note) are issued by the Reserve Bank of India, while
- coins and the one-rupee note are issued by the Government of India.
Currency with the public, together with demand deposits of banks, forms a major part of the money supply (M1).
✓Final answerCurrency means the paper notes and metallic coins in actual circulation in a country, which serve as legal tender money accepted for all payments. In India it consists of the currency notes issued by the Reserve Bank of India and the coins and one-rupee notes issued by the Government, and it forms a major part of the money supply.
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