Definition
Money Supply (M0 to M3)
Money supply measures the total money in an economy, classified into M0, M1, M2 and M3 by liquidity, from physical cash to broader deposits.
In India, M0 (reserve money) is currency plus bank reserves with the RBI; M1 adds demand deposits; M2 and M3 add savings and time deposits. M3, or broad money, is the most-watched aggregate for policy.
The RBI tracks these aggregates to gauge liquidity and inflation pressure. The ratio of broad money (M3) to reserve money (M0) is the money multiplier, showing how bank lending expands the base money created by the central bank.
Related terms
- Quantity Theory of MoneyThe quantity theory of money states that the general price level is proportional to the money supply, captured in the equation MV = PT (money times velocity equals price times transactions).
- Velocity of MoneyThe velocity of money is how many times a unit of currency is spent on goods and services in a given period; higher velocity means money circulates faster through the economy.
- Open Market Operations (OMO)Open Market Operations are the RBI's purchases and sales of government securities in the market to manage liquidity and influence interest rates.
- Money MultiplierThe money multiplier is the ratio of broad money to base money, showing how far the banking system can expand the central bank's reserve money through repeated lending.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.