Money Supply and Its Components

The money supply is the total stock of money held by the public at a given point of time. It is a stock concept (measured on a date), not a flow, and it deliberately excludes money held by the government and the banking system with itself, because that is not available for spending by the public.

Because 'money' can be defined narrowly (only the most liquid forms) or broadly (including near-money like time deposits), the central bank publishes several measures of money supply, moving from the most liquid to the least liquid:

• M1 (narrow money) = currency (notes and coins) with the public + demand deposits with banks (current and savings account balances withdrawable on demand) + other deposits with the central bank. M1 is the most liquid measure and represents money in its role as an immediate medium of exchange.
• M2 = M1 + savings deposits with post office savings banks. It is slightly broader than M1.
• M3 (broad money) = M1 + time (fixed) deposits with banks. M3 is the most widely watched aggregate for policy because it captures both spending money and the large pool of interest-earning bank deposits. Time deposits are 'near-money' — highly safe but not instantly spendable.
• M4 = M3 + all deposits with post office savings organisations (excluding National Savings Certificates). It is the broadest and least liquid measure. …