Question

Explain the components of money supply.

Hint:

M1 = Currency with public + Demand deposits with banks + Other deposits with RBI.

Answer 1

Step 1: Recall the basic (M1) measure:
The narrowest and most commonly used measure of money supply, M1, has three components.

Step 2: Currency held by the public:
This is the total value of currency notes and coins issued by the central bank/government that are actually in circulation with the public (currency held by banks/government itself is excluded, since it isn't in active circulation).

Step 3: Demand deposits with commercial banks:
These are deposits (like savings and current account balances) that can be withdrawn on demand via cheque, and are counted as money because they are directly usable as a medium of exchange.

Step 4: Other deposits with the central bank (RBI):
This is a small residual component — deposits held with the RBI by entities other than the government and banks (e.g. foreign central banks, IMF), which are also part of the money stock.

Final Answer:
Money Supply (M1) = Currency held by the public + Demand deposits of commercial banks + Other deposits with the RBI.