Which of the following are included in M1 definition of money for the Indian
economy?

1. Reserves

2. Currency

3. Time deposits

4. Demand deposits

Select the correct answer using the code given below. 

The correct answer is 2 and 4.

Key PointsM1 Definition of Money for the Indian Economy

• M1, also known as narrow money, includes assets that are highly liquid and can be quickly converted into cash.
• Currency includes all paper money and coins in circulation. It is the most liquid form of money and can be used directly for transactions. Hence, statement 2 is correct.
• Demand deposits are bank account balances that can be withdrawn on demand without any prior notice. They include current accounts and savings accounts that offer no or low interest but high liquidity. Hence, statement 4 is correct.
• Reserves, such as those held by banks at the central bank, are not directly used for transactions by the public and hence are not included in M1. Hence, statement 1 is incorrect.
• Time deposits, like fixed deposits, cannot be withdrawn before a certain date without penalty and thus, are not considered part of M1 due to their low liquidity. Hence, statement 3 is incorrect.

Additional Information

• The Indian economy uses various measures of the money supply, including M1, M2, M3, and M4. Each measure includes different components based on their liquidity.
• M2 includes M1 plus savings deposits with post office savings banks.
• M3, also known as broad money, includes M1 plus time deposits with the banking system and is a key indicator of the money supply in the economy.
• M4 includes M3 plus all deposits with the post office savings banks (excluding National Savings Certificates).
• Understanding these concepts is crucial for analyzing economic policies, inflation, and the overall health of the economy. The Reserve Bank of India (RBI) plays a pivotal role in regulating the money supply to ensure economic stability.
• Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its value. Highly liquid assets are essential for the smooth functioning of the financial markets and for enabling transactions.