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Consider the following statements:
1. Money supply is a flow variable and is measured for a certain period.
2. Interbank deposits, which one commercial bank deposits in another bank, are not included in the money supply.
3. M1 and M2 are called broad money and re-least liquid of all.
Which of the above statements is/are correct?
  • a)
    1 and 2 only
  • b)
    2 and 3 only
  • c)
    2 only
  • d)
    1, 2 and 3
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements:1. Money supply is a flow variable a...
Money supply, like money demand, is a stock variable. Hence, statement 1 is incorrect.
  • The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4. 
  • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply. Hence, statement 2 is correct.
  • M1 and M2 are known as narrow money. M3 and M4 are known as broad money. Hence, statement 3 is incorrect.
    • These gradations are in decreasing order of liquidity. M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. M3 is the most commonly used measure of the money supply. 
Additional Information
  • 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 the Reserve Bank of India.
  • 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 the 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 
Free Test
Community Answer
Consider the following statements:1. Money supply is a flow variable a...
Statement 1: Money supply is a flow variable and is measured for a certain period.
Money supply refers to the total amount of money available in the economy at a given point in time. It is measured over a specific period, usually a year, and is considered a flow variable. This means that it represents the rate at which money is being supplied to the economy. Therefore, statement 1 is correct.

Statement 2: Interbank deposits, which one commercial bank deposits in another bank, are not included in the money supply.
Interbank deposits are funds that one commercial bank deposits in another bank. These deposits are not considered part of the money supply because they do not directly affect the money available to the general public. Interbank deposits represent liabilities of commercial banks and are primarily used for settlement purposes between banks. Therefore, statement 2 is correct.

Statement 3: M1 and M2 are called broad money and are the least liquid of all.
M1 and M2 are measures of money supply used by central banks to track and analyze the money available in the economy. M1 includes currency in circulation, demand deposits, and other liquid assets. M2, on the other hand, includes M1 plus time deposits, savings deposits, and money market mutual funds.

While both M1 and M2 can be considered "broad money" as they include a wider range of assets than just currency, M2 is generally considered to be less liquid than M1. This is because M2 includes assets such as time deposits and money market mutual funds, which have longer maturities and may have restrictions on immediate withdrawal. Therefore, statement 3 is correct.

Conclusion:
From the analysis above, we can conclude that statements 1, 2, and 3 are all correct. Therefore, the correct option is C) 2 only.
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Consider the following statements:1. Money supply is a flow variable and is measured for a certain period.2. Interbank deposits, which one commercial bank deposits in another bank, are not included in the money supply.3. M1 and M2 are called broad money and re-least liquid of all.Which of the above statements is/are correct?a)1 and 2 onlyb)2 and 3 onlyc)2 onlyd)1, 2 and 3Correct answer is option 'C'. Can you explain this answer?
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