Consider the following statements about the measures of money supply:…

Consider the following statements about the measures of money supply:

(A) M2 is equal to M1 plus savings deposits with Post Office savings banks.

(B) M3 is equal to M2 plus net time deposits of commercial banks.

(C) Deposits which a commercial bank holds in other commercial banks are a part of money supply.

(D) M1 is the most liquid measure of money supply and M4 is the least liquid.

(E) M4 is equal to M3 plus total deposits with Post Office savings organisations, including National Savings Certificates.

Which of the statements given above are NOT true?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (B), (C) and (E) only

(A) M2 is equal to M1 plus savings deposits with Post Office savings banks. — True. M2 takes M1 and adds the savings deposits with Post Office savings banks.

(B) M3 is equal to M2 plus net time deposits of commercial banks. — False. M3 is M1 plus net time deposits of commercial banks.

(C) Deposits which a commercial bank holds in other commercial banks are a part of money supply. — False. Only the public’s deposits in banks count. Interbank deposits are not part of money supply.

(D) M1 is the most liquid measure of money supply and M4 is the least liquid. — True. The measures are in decreasing order of liquidity, from M1 to M4.

(E) M4 is equal to M3 plus total deposits with Post Office savings organisations, including National Savings Certificates. — False. M4 excludes National Savings Certificates.

NCERT (2026-27): “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
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. M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. …”