EconomicsMacro Economics: Money and Banking

In an economy (figures in Rs crore): currency held by the public = 50…

In an economy (figures in Rs crore): currency held by the public = 500; net demand deposits held by commercial banks = 700; savings deposits with Post Office savings banks = 200; net time deposits of commercial banks = 1,500; deposits which commercial banks hold in other commercial banks = 100. What is M2?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Rs 1,400 crore

Given:

Currency held by the public, CU = 500

Net demand deposits, DD = 700

Savings deposits with Post Office savings banks = 200

Net time deposits of commercial banks = 1,500

Interbank deposits = 100

M2 = M1 + Savings deposits with Post Office savings banks, where M1 = CU + DD.

M1 = 500 + 700 = 1,200

M2 = 1,200 + 200 = Rs 1,400 crore

Net time deposits enter only M3, which is Rs 2,700 crore. Interbank deposits are left out of every measure, so adding the 100 gives a wrong Rs 1,500 crore.

NCERT (2026-27): “Legal Definitions: Narrow and Broad Money … RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4. They are defined as follows
M1 = CU + DD
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks
M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
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.”