Q.Distinguish between M1 and M3 as measures of money supply.

M1 and M3 differ mainly in whether time deposits are included, which directly affects how liquid ('spendable on demand') each measure is.

M1 ('narrow money') consists of currency with the public, demand deposits with banks, and other deposits with the RBI. Every component of M1 is withdrawable instantly, on demand, without any loss of value or notice period — which is why M1 is described as the most liquid measure of money supply.

M3 ('broad money') consists of M1 plus time deposits with banks (fixed deposits, which cannot be withdrawn on demand without some loss of interest or a notice period). Because it includes this less-liquid component, M3 is broader — and less liquid — than M1, but it captures a fuller picture of the public's total purchasing power, including money temporarily parked in fixed deposits.

Practical distinction. M1 responds faster to changes in spending behaviour (since it is all instantly spendable), while M3 is the aggregate the RBI and most economic commentary treat as 'the' money supply of India, since it strikes the most useful balance between liquidity and comprehensiveness for monitoring inflation and setting monetary policy.

A common error is assuming M1 is 'more important' than M3 simply because it comes first in the list — for most monetary-policy and inflation-analysis purposes, M3 (broad money) is actually the more widely referenced aggregate, precisely because it is more comprehensive.