Examine the composition of money supply aggregates in India as defined by the Reserve Bank of India. Which aggregate represents the narrowest measure of money supply?

💡 Solution & Explanation

M1 represents the narrowest measure of money supply, comprising currency with the public, demand deposits with commercial banks, and other deposits with the Reserve Bank of India. M3 is the broadest measure of money supply, known as broad money, which includes M1 plus net time deposits with commercial banks. M2 includes M1 plus savings deposits with post office savings banks, while M4 includes M3 plus total post office deposits. These aggregates help the central bank monitor liquidity trends in the economy.