Which one of the following is the difference between

Solution

The basic distinction between the measurements of narrow and broad money is the treatment of time deposits of banks. Broad money = Narrow money + Time deposits In reference to the Money supply in the economy,  • Narrow Money is represented by M1. It if calculated as: M1 = Currency with the public + Demand deposits with the banking system + ‘Other’ deposits with the RBI • Broad Money is represented by M3 and is calculated as: M3 = M1 + Time deposits with the banking system OR M3 = Net bank credit to the government + Bank credit to the commercial sector + Net foreign assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector