Ravi moves Rs 10,000 from his savings account to a fixed deposit in the same commercial bank. What happens to M1 and M3?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → M1 falls by Rs 10,000 and M3 is unchanged
A savings account balance is a demand deposit, part of M1. A fixed deposit is a time deposit, which enters M3 but not M1.
M1 = CU + DD: DD falls by 10,000, so M1 falls by Rs 10,000.
M3 = M1 + net time deposits: M1 falls by 10,000 and time deposits rise by 10,000, so M3 is unchanged.
NCERT (2026-27): “The Supply of Money : Various Measures … Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder. Other deposits, e.g. fixed deposits, have a fixed period to maturity and are referred to as time deposits. …” “Legal Definitions: Narrow and Broad Money Money supply, like money demand, is a stock variable. 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. They are defined as follows |