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Explain The Four Measures of Money Supply In Economics

 The Four Measures of Money Supply In Economics. 

Money Supply:

The term Money Supply refers to the total amount of domestic money owned by the public. Money Supply in a country refers to the total stock of money in circulation. Money Supply refers to the total currency  (Coins & notes) , & demand deposits with the bank by public. 

It is expressed as M1 + M2 + M3 + M4


Four Measures of Money Supply:

There are four measures of Money Supply which are  expressed as M1, M2, M3 & M4 in India. This classification was given by RBI.

M1:-

M1 is the first measure of Money Supply. This is based on Keynesian View. In this we take the following:-

  • Total Currency with the public ( Coins & Notes) - C
  • Demand Deposits with the Commercial Banks - ( DD) 
  • Other Deposits with the RBI - ( OD) 

It is expressed as M1 = C + DD + OD

M2:-

The second measure of Money Supply is M2. This includes M1 plus Post office savings Bank deposits. It is expressed as:

M2 = M1 + Post Office Saving Bank Deposits. 

M3:- 

The third measure of money supply is M3. This includes M1 plus Time Deposits with commercial Banks. RBI calls M3 as broad Money. It is based on Friedman's View. 

Thus, M3 = M1 + Time Deposits with Commercial Banks. 

M4:- 

The Fourth measure of money supply is M4. It includes M3 plus total post office deposits. It is expressed as:-

M4:- M3 + Total Post Office saving deposits. 

Therefore, Money Supply = M1 + M2 + M3 + M4. 

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