M1 M2 M3 M4 --DEFINITIONS
The total stock of money in circulation among the public at a particular point of time is called money supply. The measures of money supply in India are classified into four categories M1, M2, M3 and M4 along with M0. This classification was introduced in April 1977 by Reserve Bank of India. Let’s discuss these one by one:
- Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.
M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI
It is the monetary base of economy. - Narrow Money (M1):
M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI - M2 = M1 + Savings deposits of post office savings banks
- Broad Money (M3)
M3 = M1 + Time deposits with the banking system - M4 = M3 + All deposits with post office savings banks
Liquidity of these Measures of Money Supply
The liquidity means how fast an instrument can be converted into cash. The liquidity of these measures are in order M1>M2>M3>M4 i.e. M1 is most liquid and M4 is least liquid.
Money Multiplier
It is the relationship between monetary base and money supply in economy. The amount money that banks generates with each unit (Rs in case of India) of money. It is the ratio of deposits to the reserves in the banking system.
For example let’s say total deposit in banking system is $100 and reserve ratio requirement is 10%.
The banks can lend 90% of deposit i.e. $90. This $90 that banks will lend to its customers will ultimately be deposited in another bank which can further lend 90% of that i.e. $81 and cycle continues.
The banks can lend 90% of deposit i.e. $90. This $90 that banks will lend to its customers will ultimately be deposited in another bank which can further lend 90% of that i.e. $81 and cycle continues.
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