Definition: The Money supply refers to the amount of domestic currency that circulates in a national economy during a specified period. Money supply includes cash, coins, and money held in savings and checking accounts for short-term payments and investments.
Importance of Money Supply:
Growth of money supply is an important factor not only for acceleration of the process of economic development but also for the achievement of price stability in the economy.
There must be controlled expansion of money supply if the objective of development with stability is to be achieved. A healthy growth of an economy requires that there should be neither inflation nor deflation. Inflation is the greatest headache of a developing economy.
According to the standard concept of money supply, it is composed of the following two elements:
1. Currency with the public,
2. Demand deposits with the public.
Before explaining these two components of money supply two things must be noted with regard to the money supply in the economy.
First, the money supply refers ‘to the total sum of money available to the public in the economy at a point of time. That is, money supply is a stock concept in sharp contrast to the national income which is a flow representing the value of goods and services produced per unit of time, usually taken as a year.
Secondly, money supply always refers to the amount of money held by the public. In the term public are included households, firms and institutions other than banks and the government. The rationale behind considering money supply as held by the public is to separate the producers of money from those who use money to fulfill their various types of demand for money.
Currency with the Public:
Therefore,In order to arrive at the total currency with the public in India we add the following items:
1. Currency notes in circulation issued by the Reserve Bank of India.
2. The number of rupee notes and coins in circulation.
3. Small coins in circulation.
Demand Deposits with the Public:
The other important components of money supply are demand deposits of the public with the banks, That demand deposits held by the public are also called bank money or deposit money. Deposits with the banks are broadly divided into two types: demand deposits and time deposits.
Demand deposits in the banks are those deposits which can be withdrawn by drawing cheques on them. Through cheques these deposits can be transferred to others for making payments from which goods and services have been purchased.
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