During a week, two things happen: (i) Bank A places a deposit of Rs 100 crore with Bank B, and (ii) households move Rs 50 crore from their savings deposits to fixed deposits in commercial banks. What is the net effect on M1 and M3?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → M1 falls by Rs 50 crore, and M3 does not change.
M1 = currency + net demand deposits; M3 = M1 + net time deposits. Savings deposits are demand deposits, fixed deposits are time deposits, and interbank deposits are not money.
(i) Bank A’s deposit with Bank B is an interbank deposit, so neither M1 nor M3 changes.
(ii) Rs 50 crore moves from demand deposits to time deposits. M1 falls by Rs 50 crore. In M3 the fall in M1 is made up by the rise in time deposits, so M3 does not change.
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 M1 = CU + DD M2 = M1 + Savings deposits with Post Office savings banks M3 = M1 + Net time deposits of commercial banks …” “where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks. The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply. …” |