RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4. In this context which of the following is called as narrow money?

Correct option is B

The correct answer is (b) M1 and M2

Explanation:

In India, RBI publishes data on four measures of the money supply: M1, M2, M3, and M4.

• M1 and M2 are referred to as Narrow Money.
• M3 and M4 are called Broad Money.

M1 (Narrow Money) includes:

• Currency notes and coins with the public
• Demand deposits with the banking system (like savings and current accounts)
• Other deposits with the RBI (like deposits of foreign governments, financial institutions)

M2 includes:

• All components of M1
• Plus, savings deposits with Post Office Savings Banks (excluding National Savings Certificates).

Thus, M1 and M2 represent the highly liquid forms of money, usable for immediate spending, and are classified as Narrow Money.

Information Booster:

About Money Supply Aggregates:

• M1 = Currency with the public + Demand deposits with the banking system + Other deposits with RBI.
• M2 = M1 + Savings deposits with post office savings banks.
• M3 = M1 + Time deposits with the banking system.
  (M3 is also called Broad Money and is most commonly used for monetary policy formulation.)
• M4 = M3 + Total deposits with the post office savings banks (excluding National Savings Certificates).

Remember:

• Liquidity decreases from M1 → M4 (i.e., M1 is most liquid, M4 least).