Question

Explain any one component of money supply.

Hint:

Pick one component, such as net demand deposits with commercial banks. These are chequable deposits that the holder can withdraw on demand.

Answer 1

Step 1: Understand the question:
We have to explain any one component of money supply. It carries 2 marks, so give the name of the component and two clear points about it.
The marking scheme accepts any valid component. Net demand deposits is the standard choice from the NCERT chapter on money and banking.

Step 2: Name the component:
The component chosen is net demand deposits (DD) held by commercial banks.
These are the deposits that the public keeps in current and savings accounts, which can be taken out whenever the account holder asks.

Step 3: Explain how it works as money:
Demand deposits are chequable. The account holder can pay another person by cheque, debit card or online transfer, so they work like cash.
This is why they are counted as money. Only the net deposits of the public are taken. Deposits of one bank with another bank are subtracted to avoid double counting.

Step 4: Show where it fits in money supply:
Money supply is made up of currency held by the public and net demand deposits with commercial banks, along with a few smaller items.
Demand deposits are the larger part in a modern economy, because most payments are made through banks.

Final Answer:
Net demand deposits held by commercial banks are a component of money supply. They are chequable deposits that the account holder can withdraw on demand.