Explain important facts about measures of money supply
Answers
Money Supply refers to total volume of money held by public at a particular point of time in an economy.
Features of Money Supply:
1. It includes ‘money held by public only’. The term ‘public’ signifies the money-using sector, i.e. individuals and business firms. It does not include money-creating sector, i.e. Government and banking system as cash balances held by them do not come into actual circulation in the country.
2. It is a ‘Stock Concept’, i.e. it is concerned with a particular point of time.
Measures of Money Supply:
Till 1967-68, Reserve Bank of India (RBI) used only the narrow measure of money supply. But, since 1977, four alternative measures of money supply (M1, M2, M3 and M4) have been evolved:
(I) M1:It is the first and basic measure of money supply. It is also known as ‘transaction money ‘ as it can be directly used for making transactions.
M1 = Currency and coins with Public + Demand Deposits of Commercial Banks + Other Deposits with RBI
M1 is the most liquid measure of money supply as all its components are easily used as a medium of exchange.
It consists of paper notes and coins held by the public. Remember, any currency held with the government and banks is not to be included.
2. It includes coins of denominations of Rs 10, 5, 2, 1, etc. and paper notes of denominations like Rs 1,000, 500, 100, etc.
3. Currency money is also termed as ‘Fiat Money’. Fiat money is defined as the money which is under the fiat or order from the government to act as money, i.e. under law, it must be accepted for all debts.
4. It is also termed as ‘Legal Tender Money’ as it can be legally used to make payment of debts or other obligations.
1. Currency and coins with Public:It consists of paper notes and coins held by the public. Remember, any currency held with the government and banks is not to be included.
2. It includes coins of denominations of Rs 10, 5, 2, 1, etc. and paper notes of denominations like Rs 1,000, 500, 100, etc.
3. Currency money is also termed as ‘Fiat Money’. Fiat money is defined as the money which is under the fiat or order from the government to act as money, i.e. under law, it must be accepted for all debts.
4. It is also termed as ‘Legal Tender Money’ as it can be legally used to make payment of debts or other obligations.
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