Sita deposits Rs 5,000 of currency, which she was holding at home, in her Post Office savings bank account. What happens to M1 and M2?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → M1 falls by Rs 5,000 and M2 is unchanged
M1 counts currency held by the public. M2 adds savings deposits with Post Office savings banks to M1.
Currency with the public falls by Rs 5,000, so M1 falls by Rs 5,000.
Post Office savings deposits rise by Rs 5,000. In M2 the fall in currency and the rise in deposits cancel, so M2 is unchanged.
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 |