SSC
Which is the most liquid measure of money supply in India?
Answer (Detailed Solution Below)View answer ▾Hide ▴
Answer: Option B — M1 (narrow money)
Detailed Solution
Money supply is the total stock of money available in an economy at a given time. The Reserve Bank of India measures it using different "monetary aggregates", which differ according to their liquidity, that is, how quickly and easily the money can be used to make payments.
In 1977, the RBI's Second Working Group on Money Supply introduced four measures:
- M1 = Currency with the public (notes and coins) + Demand deposits with banks (current and savings account deposits that can be withdrawn on demand) + Other deposits with the RBI.
- M2 = M1 + Savings deposits with post office savings banks.
- M3 = M1 + Time deposits with banks (fixed and recurring deposits).
- M4 = M3 + Total deposits with post office savings organisations (excluding National Savings Certificates).
M1 is the most liquid measure, because currency and demand deposits can be used immediately for transactions. It is called narrow money. M3 is called broad money, and it is the most commonly used measure of money supply in India. Liquidity decreases from M1 to M4: M1 > M2 > M3 > M4.
In 1998, a working group headed by Dr Y.V. Reddy proposed a new set of monetary aggregates (NM0, NM1, NM2 and NM3) and liquidity aggregates (L1, L2 and L3), which the RBI also publishes.
Reserve money (M0), also called high-powered money or base money, is the money created directly by the RBI. It consists of currency in circulation, bankers' deposits with the RBI and other deposits with the RBI. It is called high-powered money because commercial banks can create a multiple of it in the form of deposits through lending; this is called the money multiplier.
The velocity of money is the number of times a unit of money changes hands in a given period.
Why not the other options?
- ✗M3 (broad money) is less liquid than M1 because it includes time deposits.
- ✗M2 includes post office savings deposits.
- ✗M4 is the least liquid measure.
Quick tip
Remember: M1 = currency + demand deposits + other deposits with RBI (narrow money, most liquid); M3 = M1 + time deposits (broad money, most used); M0 = reserve money (high-powered money).
💬 Discussions on this question
Ask a doubt ›Still stuck on this question? Ask our faculty and fellow students — answers appear here.
Ask a doubtMore Money, Banking & RBI Questions
View all ›- Q1.The Reserve Bank of India was established on:
- Q2.In which year was the Reserve Bank of India nationalised?
- Q3.Who was the first Governor of the Reserve Bank of India?
- Q4.The rate at which the RBI lends money to commercial banks for the short term, against government securities, is called the:
- Q5.Which of the following focuses on improving financial awareness among rural populations in India?
More General Knowledge Questions
- Q1.The techniques of Rasa and Bhava used in Indian classical dance trace their origin to which ancient text?Indian Dance Forms
- Q2.Lavani, Powada, Koli, Waghya Murali and Dhangari Gaja are folk dances of which state?Indian Dance Forms
- Q3.The one-act play associated with the Sattriya tradition of Assam is called:Indian Dance Forms
- Q4.Which dance form of Goa is known as the 'Warrior Dance'?Indian Dance Forms
- Q5.Manipuri dance is based on the Rasleela themes of:Indian Dance Forms
Money, Banking & RBI — Preparation
This question tests your understanding of Money, Banking & RBI, a key topic in the General Knowledge section. The detailed solution above uses a step-by-step approach to show the reasoning, and where available, a shortcut that helps you solve similar questions in under 90 seconds during the actual exam.
This topic covers money and its functions, the banking system in India, the Reserve Bank of India and monetary policy, policy tools such as the repo rate, reverse repo rate, CRR and SLR, bank nationalisation, types of banks, and payment systems such as NEFT, RTGS and UPI. Banking exams test this topic in depth. Questions often ask when the RBI was set up (1935, on the recommendation of the Hilton Young Commission), when it was nationalised (1949), what each policy rate means, and when major banks were nationalised (14 banks in 1969 and 6 in 1980). Current policy rates change often, so check the latest RBI announcements. Practise the money, banking and RBI questions below, written in the style of the general awareness sections of exams such as SSC, banking, railways, CUET GAT, MAH CET and CLAT. Each question comes with a detailed explanation that adds related facts, so every question helps you revise more than one point.