Q.What is money supply? Distinguish between M1 and M3.
Money supply is the total stock of money held by the public — households and firms — at a given point in time, excluding money held by the government for its own use and reserves held by banks. It is a stock, not a flow, concept.
| Basis | M1 (Narrow Money) | M3 (Broad Money) |
|---|---|---|
| Composition | Currency with the public + demand deposits with banks + other deposits with the RBI | M1 + time deposits with banks |
| Liquidity | Most liquid — spendable immediately | Less liquid — time deposits need withdrawal/notice |
| Use | Tracks immediately spendable money | The aggregate most widely used for RBI policy analysis |
M1 is the narrowest measure precisely because every component in it can be spent at once, with no waiting period. M3 is wider because it also captures money temporarily parked in fixed/time deposits — not instantly spendable, but real purchasing power that can still be mobilised.
Money supply is the public's total money stock at a point in time; M1 covers only its most liquid components, while M3 (= M1 + time deposits) is the broader measure used most often for policy.
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