Question

1. Prepare an essay in which you explain in your own words the components of the money supply that must include M1 and M2 and that implies the Guarantee of the Monetary Offer.

Answer 1

Introduction:

Money supply refers to that particular amount that continuously circulates in the exonomy because of its highly liquid nature as well as because of being negotiatiable thus can beceasily transferred from one to another.
Money supply is easily and conveniently used as the exchange medium and the basic source or means for conducting transactions such as for making purchases and payments

The main components of money supply are:

1) Currency: It refers to that particular type of money supply which is used by the consumers , households and businesses inorder to maintain the cost of living , meet day today needs, purchase commodities to survive , to maintain the living standards, to buy assets, to obtain resources etc.

Currency means circulations of money within the public

The currency consists of Coins and Paper notes which Reserve Bank Of Country has the only right to issue.

2) The Deposits of people in banks in the form of savings but are payable on demand are also said to be a component of money supply.
In US particularly 75% to about 81% of the total money supply are in the form of bank deposits.

3) Another most important component of money supply as considered are such assets in liquid form e.g savings and bills issued by government.

M1
It can be defined as a narrow concept of money supply which is basically the combination of certain components of money supply.
M1 money also called the narrow money is more dominant in the economy. It consists of the following components:
The first being the currency with the population
The second being the demand deposits hekd on commercial banks , cooperative banks and other financial institutions belonging to public
The another being the other deposits which can be referred as the particular amount of moneuy which is held by the Reserve Bank.

Therefore M1= currency + demand deposits + other deposits.

Currency as explained above consists of notes, and coins .

Demand deposit consists of deposits that are to be paid on demand , no such stipulated period is given.

The other deposits

These include:
Deposits in institutions such as IDBI, IFCI, UTI etc

Deposits from foreign govt and banks.

Demand deposits of world bank and International monetary fund.

Money Supply M2
M2 is much more broad view of looking at the money supply.
M2 includes all the components of M1 , ie all the three items as explained above ,
But moreover the M2 Includes post office savings.
M2= M1 + savings from post office

The main reason behind the categorisation of M2 from M1 despite of being almost same is the component of post office savings.
This addition in Money supply separates m2 from m1 .
Because post office savings to a certain extend do not fall in the category of liquid assets.
They are available only after a stipulated period not on demand thus are not as liquid as the demand deposits or other deposits. Post office moreover does not issue cheques as in case of demand deposits
But they are included in M2 category because of bei g more liquid than the term deposits held with the banks.

M3
All components of M1 are included here plus an addition of term deposits

Therefore M3 = M1 + time deposits held with the commercial banks and other financial institutions

It is because that time deposits are said to be a secondary source used by people or businesses to obtain loans from banks against these time deposits
Therefore time deposits are also a source of obtaining urgent funds whenever neccessary incase such situation arises, therefore are said to have an essence of being liquid in some manner for conducting transactions.

Moreover there is also an option available with time deposits that they can be obtained orcwithdrawn before time by letting go some benefits e.g interest etc.

Money Supply M4:
M4 is the component of money supply which consists of all the items as described in M3 and an addition of all deposits held with post office in the form of savings.

M4 = M3 + Deposits with post offices.

High powered money
High powered money which is denoted by (H) is referred to as the money in the firm of notes such as dollars and coins .
They are called so Because of their highly liquid nature, obtained whenever possible, transferred conveniently

Money multiplier
It is basically the extent or degree to which there is an expansion in the supply of money because of the increase in high- powered money.

Thank you.

Hope i explained well in the limited time.

God bless and Good luck

Sorry for any typing mistake :)