In an economy, the currency held by the public, Net Demand Deposits with Commercial Banks and Net Time Deposits with Commercial Banks stand at 1,42,000 crore, 22,000 crore and 86,000 crore respectively. The value of Money Supply (M1) would be crore. (Choose the correct option to fill in the blank)
In an economy, the currency held by the public, Net Demand Deposits with Commercial Banks and Net Time Deposits with Commercial Banks stand at 1,42,000 crore, 22,000 crore and 86,000 crore respectively. The value of Money Supply (M1) would be crore. (Choose the correct option to fill in the blank)
Options
Correct option: (C) ₹1,64,000 crore
Formula: M1 = Currency held by the public + Net Demand Deposits with commercial banks + Other deposits with RBI
Calculation:
- Currency held by the public = ₹1,42,000 crore
- Net Demand Deposits = ₹22,000 crore
- Other deposits with RBI = ₹0 (not mentioned, so taken as nil)
- M1 = = ₹1,64,000 crore
Net Time Deposits (₹86,000 crore) are excluded from M1 — they are included only in the broader measure M3.
Marking Scheme
- 11 mark for correctly choosing option (C) with correct M1 formula applied.
Hint
M1 = Currency + Demand deposits + Other RBI deposits; Time deposits belong to M3, not M1.
Quick Oral Answer
M1 equals currency held by the public plus net demand deposits with banks plus other deposits with the RBI — time deposits are excluded and belong to M3 instead.
Analysis & Explanation
M1 is the narrowest and most liquid measure of money supply, comprising only currency and demand (chequable) deposits.
Why (C) is correct
- M1 = Currency with public + Net Demand Deposits + Other deposits with RBI = crore.
Why the other options are wrong
- (A) 2,50,000 wrongly adds all three figures including Net Time Deposits, which belong to M3, not M1.
- (B) 86,000 is only the Net Time Deposits figure — irrelevant to M1.
- (D) 1,42,000 is only currency with the public, ignoring demand deposits entirely.
This question tests whether students can correctly identify which components belong in M1 versus M3.
Common Mistakes
- 1Adding Net Time Deposits into M1 — a very common error since M1 and M3 are frequently confused.
- 2Forgetting 'Other deposits with RBI' as a component of M1, though it is usually negligible/zero unless stated.
- 3Selecting only currency held by the public and ignoring demand deposits.
Interesting Facts
M1 is called 'narrow money' and is the most liquid measure, while M3 ('broad money') is the RBI's preferred aggregate for policy analysis.
As per RBI convention, M1 < M2 < M3 < M4 in terms of size, since each subsequent measure adds progressively less liquid assets.
Post office savings deposits are included in M2 but not in M1 or M3, making the four measures overlap only partially.
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Frequently Asked Questions
Why are Net Time Deposits excluded from M1?
Time deposits are not immediately withdrawable/chequable, so they lack the liquidity required for M1 (narrow money). They are included in M3 instead, which measures broad money.
What is the full formula for M1?
M1 = Currency held by the public + Net Demand Deposits with commercial banks + Other deposits with the RBI (deposits of foreign banks, financial institutions etc. with RBI, excluding government and bank deposits).