Question

Which approach among the following four important approaches to define money, identifies the money with the credit extended by a wide variety of sources?

• A. Gurley and Shaw Approach
• B. Central Bank Approach
• C. Chicago Approach
• D. Conventional Approach

Hint:

To remember:
- Conventional: Only Currency + Demand Deposits.
- Chicago: Adds Time Deposits.
- Gurley-Shaw: Adds Non-Banking Financial Assets.
- Central Bank: Focuses on total liquidity and credit.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Economists define and measure the money supply using different approaches, ranging from narrow definitions of liquid assets to broad definitions that include various credit instruments.

Step 2: Detailed Explanation:
Let us analyze the four primary approaches used to define money:
1. Conventional Approach (D): This narrow approach defines money strictly by its function as a medium of exchange.
It includes only currency (coins and paper notes) and demand deposits held with commercial banks.
2. Chicago Approach (C): Associated with Milton Friedman, this approach includes currency, demand deposits, and commercial bank time deposits (such as fixed deposits). It emphasizes money's role as a store of value.
3. Gurley and Shaw Approach (A): This approach includes liabilities of non-banking financial intermediaries (such as savings bank deposits, bonds, and shares) as close substitutes for money.
4. Central Bank (or Radcliffe Committee) Approach (B): This broad approach defines money in terms of total liquidity in the economy.
It argues that monetary policy is influenced by the total amount of credit available to spend, which includes credit extended by commercial banks, non-banking financial institutions, retailers, and other credit sources.
Therefore, this approach identifies money with the credit extended by a wide variety of sources.

Step 3: Final Answer:
The approach that identifies money with credit extended by a wide variety of sources is the Central Bank Approach, matching Option (B).