Supply of Money – Definition, Components formula, FAQs Class 12

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Are you looking for, what is supply of Money its definition and components of it. I have explained these topic as per the syllabus of economics class 12.

See, supply of Money topic is very wide. But as per the syllabus of class 12 Economics its study is very restricted. I will topic about it also at the end.

lets first discuss What is Money Supply as per the syllabus of Economics Class 12 CBSE Board.

Table of Contents

What do you Mean by Money Supply?

Before I explain the ‘Money supply’. Let me clear one concept. The word ‘supply’ in ‘money supply’ denotes ‘stock’. In other words you can say ‘Money Stock’.

In very simple word, we can say money supply is the stock of money available at a particular point of time that can readily be used for transactions.

Hence Money supply also called transactions Money.

Definition of Money Supply in Economics Class 12

Various book have given definition of Money supply. I have given all definitions written in different book as it is given.

“Money Supply refers to total volume of money held by public at a particular point of time in an economy”

Sandeep Garg Book

“Supply of Money is a stock concept. It refers to, total stock of money(all types) held by the people of a country at a point of time”

TR Jain

“Money supply is the total amount of coins and currency outside of banks, and the total amount in demand deposits on a specific day”

SK Aggarwal

“Money supply of a country is the stock of money on a specific day”

SK Aggarwal

What are the components of money supply class 12

Commonly, there are different measures that serve as money directly or indirectly. Hence economists have grouped these different components of money supply and named them differently.

You might have heard about M1, M2, M3 and M4 components of money supply.

But wait, As per the syllabus of class 12 CBSE Board. You don’t have to memorize all components of it. rather you don’t have to right its name also M1, M2, M3, and M4

We will study only the most common and basic measure of it.

In simplest words, Money supply includes those assets which can be directly used for transactions. It is also called transactions money.

It consists of

  1. Currency with public
  2. Demand deposits

Lets understand both components one by one.

1. Currency with Public:-

Money supply includes only that currency which is held outside banks. It means currency held by the banks and government is not included.

In other words, money supply includes currency held only by the public. It is only one components of money supply.

It consists of paper notes and coins held by the public.

  • As far as coins are concerned, it includes of denominations of ₹ 10,5,2,1.
  • We also have currency (paper) notes ranging from one rupee to two thousand rupees. (one, two, five, ten, twenty, fifty, hundred, five hundred and two thousand rupee notes)
  • Current money also termed as Fiat Money. Fiat Money or Currency is defined as the money which under law must be accepted for all debts.
  • It is also termed as ‘Legal Tender Money’ as it can be legally used to make payment of debts or other obligations.

Note:- Any Currency held with the government and banks is not be included.

2. Demand Deposits of Commercial Banks:-

It refers to the demand deposits of the public with commercial banks. The public can withdraw such deposits at any time by issuing cheques or through ATM machines.

A demand deposits is also treated equivalent to currency held as it is too readily available and accepted as a means of payment.

Formula of Money Supply class 12

Money Supply = Currency held outside banks + Bank deposits of public with Commercial Banks

Note:- Many reference books also includes ‘other deposits with Reserve Bank of India‘ in Money Supply. But as per the syllabus of the Money and Banking chapter of Class Economics, It is not to be studied for class 12. Hence ignore it.

Q. Money Supply is a stock of Flow.

Ans. It is Stock concept as it is measured at a particular point of time.

Q. Does Money supply also includes other deposits with Reserve Bank of India.

Ans. As per the syllabus of Class 12 Economics. This components is out of syllabus. As per the syllabus of Class 12 CBSE Board, Money supply only includes 1) Current held by the public 2) Bank deposits of public with commercial Banks.

Q. What is Fiat Money?

Ans. Fiat Money refers to that money which is issued by order/authority of the Government. It includes all note and coins and legally must be accepted in economic transactions and in settlement of debts.

Q. What is High Powered Money?

It is the sum total of, a) currency held by the people, b) value cash of the commercial banks, and c) cash reserves of the commercial banks with the RBI.

Q What is Paper Money?

Ans. All paper notes issued by the government authority and generally accepted as medium of exchange in economics transactions and settlement of debts.

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