Money Supply and Inflation
Money supply refers to the total stock of money circulating in an economy at a specific point in time. In India, the Reserve Bank of India (RBI) tracks and controls this money. It is important to know that 'public' includes individuals and businesses, but not the government or the banking system itself. Money supply is like the blood in the human body; it needs to be just the right amount for the economy to function smoothly. If there is too little money, businesses cannot grow.
Concepts (3)
This type of inflation happens when the demand for goods grows faster than the supply. When the economy is doing well, people have more jobs and higher salaries. They start spending more on cars, clothes, and electronics.
This type of inflation happens when the demand for goods grows faster than the supply. When the economy is doing well, people have more jobs and higher salaries. They start spending more on cars, clothes, and electronics. If factories cannot produce these things fast enough, the prices go up. Example: During a festival season, if everyone wants to buy a specific brand of sweets but the shop has limited stock, the shopkeeper increases the price.
Liquidity refers to how easily an asset can be converted into cash without losing its value. Cash is the most liquid asset because you can use it instantly to buy goods.
Liquidity refers to how easily an asset can be converted into cash without losing its value. Cash is the most liquid asset because you can use it instantly to buy goods. A house or a long-term fixed deposit has low liquidity because it takes time to get cash from them. In money supply measures, M1 has the highest liquidity, while M4 has the lowest. For example, a 100-rupee note in your pocket is perfectly liquid, but a gold chain is less liquid as you must sell it first.
M1 is the most basic measure of money supply. it includes three things: Currency with the public (coins and notes), Demand Deposits (money in savings and current accounts that you can withdraw anytime), and 'Other' deposits with the RBI.
M1 is the most basic measure of money supply. it includes three things: Currency with the public (coins and notes), Demand Deposits (money in savings and current accounts that you can withdraw anytime), and 'Other' deposits with the RBI. It is called 'Narrow' because it only includes money that is ready for immediate transactions. Example: The balance in your Google Pay or PhonePe linked to your bank account is part of M1.
Ready to practice? Start an interactive lesson.
Start Lesson: Demand-Pull Inflation