PPT: The Concept of Money Supply | Business Economics for CA Foundation PDF Download

 Page 1


The Concept of Money Supply
Page 2


The Concept of Money Supply
Introduction to Money Supply
Medium of Exchange
Facilitates buying and selling of goods and services
Unit of Account
Measures and expresses value of goods and services 
in monetary terms
Store of Value
Enables people to save money for future use
Money must be connected to economic activities and defined as liquid financial assets. 
Economic stability requires maintaining an ideal money supply level.
Page 3


The Concept of Money Supply
Introduction to Money Supply
Medium of Exchange
Facilitates buying and selling of goods and services
Unit of Account
Measures and expresses value of goods and services 
in monetary terms
Store of Value
Enables people to save money for future use
Money must be connected to economic activities and defined as liquid financial assets. 
Economic stability requires maintaining an ideal money supply level.
Components of Money Supply
1
M1
Currency in public hands + Demand deposits with banking system
2
M2
M1 + Savings deposits from post office savings banks
3
M3 (Broad Money)
M1 + Time deposits with the banking system
Note: 'Public' includes households, firms, and institutions but excludes money producers like 
government and banking system.
Page 4


The Concept of Money Supply
Introduction to Money Supply
Medium of Exchange
Facilitates buying and selling of goods and services
Unit of Account
Measures and expresses value of goods and services 
in monetary terms
Store of Value
Enables people to save money for future use
Money must be connected to economic activities and defined as liquid financial assets. 
Economic stability requires maintaining an ideal money supply level.
Components of Money Supply
1
M1
Currency in public hands + Demand deposits with banking system
2
M2
M1 + Savings deposits from post office savings banks
3
M3 (Broad Money)
M1 + Time deposits with the banking system
Note: 'Public' includes households, firms, and institutions but excludes money producers like 
government and banking system.
Rationale of Measuring Money Supply
1
Understanding Money Growth
Provides insights into factors driving monetary 
developments in the economy
2
Monetary Policy Framework
Crucial for evaluating alignment between money 
supply and price stability goals
Central banks use monetary policy to stabilize prices and promote GDP growth by controlling money 
supply through managing the monetary base.
Page 5


The Concept of Money Supply
Introduction to Money Supply
Medium of Exchange
Facilitates buying and selling of goods and services
Unit of Account
Measures and expresses value of goods and services 
in monetary terms
Store of Value
Enables people to save money for future use
Money must be connected to economic activities and defined as liquid financial assets. 
Economic stability requires maintaining an ideal money supply level.
Components of Money Supply
1
M1
Currency in public hands + Demand deposits with banking system
2
M2
M1 + Savings deposits from post office savings banks
3
M3 (Broad Money)
M1 + Time deposits with the banking system
Note: 'Public' includes households, firms, and institutions but excludes money producers like 
government and banking system.
Rationale of Measuring Money Supply
1
Understanding Money Growth
Provides insights into factors driving monetary 
developments in the economy
2
Monetary Policy Framework
Crucial for evaluating alignment between money 
supply and price stability goals
Central banks use monetary policy to stabilize prices and promote GDP growth by controlling money 
supply through managing the monetary base.
Sources of Money Supply: Digital Evolution
Digital Rupee (e¹)
RBI's CBDC initiative aims for minimal 
disruption to the financial system
Phased Implementation
RBI progressing through various pilot stages 
before final CBDC launch
CBDCs are legal tender issued by central banks in digital form, exchangeable at par with existing 
currency and appearing as liabilities on central bank balance sheets.