Question

Identify, which of the following are the correct features of money supply in an economy.

(Choose the correct alternative)

(i) It is a stock concept.

(ii) It includes money held by banks and government.

(iii) It is a flow concept.

(iv) It includes money held by households and firms.

• A. (i) and (iv)
• B. (ii) and (iii)
• C. (iii) and (iv)
• D. (i) and (ii)

Hint:

Money supply is a stock concept and counts only the money held by the public, meaning households and firms. Money held by banks and government is excluded.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Money supply is the total stock of money held by the public at a point of time. The public means households, firms and other users of money.
The Reserve Bank of India measures it as a stock on a given date.

Step 2: Check Statement (i):
Money supply is measured on a particular date, like the water in a tank. So it is a stock concept. Statement (i) is TRUE.

Step 3: Check Statement (ii):
Money held by the banks and by the government is not counted in money supply. These holdings are the source of money and not the holdings of the public, and counting them would give double counting. Statement (ii) is FALSE.

Step 4: Check Statement (iii):
A flow is measured over a period of time, such as income per year. Money supply is not a flow, so statement (iii) is FALSE.

Step 5: Check Statement (iv):
Money held by households and firms is the money held by the public. This is what money supply includes. Statement (iv) is TRUE.

Step 6: Match with the Options:
(A) (i) and (iv): both true, so this is correct.
(B) (ii) and (iii): both false, so it is wrong.
(C) (iii) and (iv): (iii) is false, so it is wrong.
(D) (i) and (ii): (ii) is false, so it is wrong.

Final Answer:
Money supply is a stock that includes money held by households and firms. Option (A) is correct.