Q.What is money supply? Briefly explain its components M1 and M3.

Money supply measures how much money the public holds and can spend, and it is published in aggregates of decreasing liquidity.

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

Because money can be defined narrowly or broadly, several measures are published, from most to least liquid:

M1 (narrow money) = currency (notes and coins) with the public + demand deposits with banks (current and savings 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. …

Students sometimes include money held by the government or banks within money supply — it is only money held by the public. Another error is thinking M3 is more liquid than M1; …