Question

Sumit deposited ₹ 10 lakh in his savings account. The deposits made by him is a part of ____________ in the \(M_1\) measure of money supply.

• A. Currency held by public
• B. Interbank deposits
• C. Demand deposits with commercial banks
• D. Term deposits with Reserve Bank of India (RBI)

Hint:

Savings accounts are treated as demand deposits because they are withdrawable on demand, hence included in \(M_1\).

Answer 1

The Correct Option is C

Concept: Measures of Money Supply
Money supply refers to the total stock of money available in an economy at a given point of time. One of the important measures is \(M_1\), also known as narrow money: \[ M_1 = \text{Currency with public} + \text{Demand deposits with banks} + \text{Other deposits with RBI} \] This measure includes the most liquid forms of money that can be readily used for transactions.
Step 1:Identify type of deposit
Savings account deposits have the following characteristics:

• They can be withdrawn on demand using cheques, ATMs, or online transfers.
• Although some restrictions may exist (like limited withdrawals), they are still largely accessible.

Hence, savings deposits are treated as:

• Demand deposits

Step 2:Classify under \(M_1\)
Demand deposits form a key component of \(M_1\):

• Savings account deposits are included under: \[ \text{Demand deposits with commercial banks} \]
• Therefore, they are a part of the narrow money supply.

Step 3:Conclusion
\[ \text{Savings account deposit is part of demand deposits and is included in } M_1 \]