What does the Supply of Money Refers? (2 Concepts)

Supply of money refers to aggregate stock of domestic money owned by public in the country. The term public refers to the private individuals and firms operating in the economy.

Cash balances held by the central and the state governments, those held by central bank, treasury and commercial banks do not comprise money supply. The reason for their exclusion from the sources of money supply is the fact that cash balances held by them are not in actual circulation in the country. Money supply thus refers to the total volume of money circulating in the public at a point of time. Being a stock concept, money supply always refers to a point of time.

There are mainly two concepts of money supply:

(a) Narrow Concept:

According to this concept, all assets that serve as medium of exchange are to be included in money supply. Generally, economists under this concept consider currency and demand deposits as the two components of money supply. Money supply, M^s, can thus be expressed as

M^s = C + DD

Here, C refers to currency and DD to net demand deposits. The term net refers to that part of the demand deposits which can be withdrawn through cheques by public. Net demand deposits can be obtained by subtracting inter-bank deposits from total demand deposits. The inter-bank deposits refer to deposits of one bank held with other bank(s). Such deposits can’t be withdrawn by public.

(b) Broader Concept:

The broader concept of money supply is based not only on the medium of exchange function of money but also on the store value function of it. Accordingly, all assets possessing liquidity high enough to serve as a store of value along with the currency and the demand deposits of public comprise money supply in broader sense. The expression for money supply under this concept can be made as:

M^s = C + DD + TD

Here, TD refers to time deposits (fixed deposits) with commercial banks as well as those with the post offices while DD, to the net demand deposits. Note that the time deposits qualify as a component of money supply in broader sense.