There are two alternative measures of money supply, viz., (1) Narrow measure of money supply, and (2) Broad measure of money supply

Narrow Measure of Money Supply

Most economists accept the narrow measure of the money supply, which includes currency (i.e., notes and coins) and demand deposits (i.e., bank deposits transferable by cheque) held by the public in a country.

Components of Money Supply

The total money supply in a country comprises: (1) currency (both notes an coins), and (2)demand deposits (bank deposits transferable by cheque) held by the public with the commercial banks. This measure of money supply is ususlly referred to as M₁. Thus,

M₁ =Currency + Demand Deposits

It is the most accepted measure of money supply for it includes only those assets which are generally acceptable as a means of payment.

(1)    Currency is issued by the government or the central bank. it is legal tender money for it is generally accepted and is used in all transactions and settlement of debts. Its general acceptability as a means of payment has made it an important constituent of money supply.

(2)    Demand deposits held by the public with commercial banks are considered money because they are rapidly accepted as a means of payment. Both, currency and demand deposits, are most liquid assets that form the constituents of money supply defined in a narrow sense.

Exclusion of Time Deposits

According to this definition, saving and time deposits are not money. Saving and time deposits (hereafter referred to as time deposits) differ from demand deposits in several ways.

First, time deposits can be withdrawn only at the expiry of the fixed period, expect in certain special circumstances.

Secondly, unlike demand deposits, interest is paid on time deposits.

Finally, since time deposits must be coverted into currency or demand deposits in order to facilitate the exchange of goods and services,t ehy do not serve as a means of payments.

Exclusion of Currency with Government and Banks

The currency held by the Government in its treasury and the money lying with the central bank and commercial banks is not included in money supply. This is because of the following two reasons:

(1)    It is not in circulation, and
(2)    It might result in double counting.

The currency held by the government and by the central bank and commercial banks is not included in ‘money supply’ because it sis not in circulation. It is the money held by private individuals and business firms which is most important to the level of spending Secondly, if we include the currency held by banks it might result in double counting. For example, suppose individual deposits Rs. 1,000 in cash in his current account. The demand deposit so created is counted as part of the money supply. But for the reasons just mentioned, Rs. 1,000 in cash held by the bank is not counted. If this is counted this will lead to double counting.

Thus, it is clear that the money supply of a country at any one point of time is the total amount of money in circulation that is in existence.

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