Read this article to learn about the top two frequently asked questions on money and banking.
Q.1. Explain the concepts of M1, M2, M3, and M4.
Ans. Reserve Bank of India has presented four measures of money supply as under:
(a) M1:
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M1 is narrow concept of money. M1 is the most liquid but least comprehensive measure.
M1 = C + DD + OD
Where C = Currency held by the public.
DD = Net demand deposits of bank (excluding interbank deposits).
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OD = Other deposits held with the RBI. These are deposits of quasi government institutions like IDBI, IMF, World Bank etc.
(b) M2:
M2 is also narrow concept. It includes M, and savings of the people with the post office.
M2 = M1 + Savings of the people with post offices.
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(c) M3:
M3 is broad money. It is most commonly used measure of money supply. Besides M1, it includes net time deposits of the people with commercial banks.
M2 = M1+ Net time deposits with the commercial banks.
Money supply in the country is measured using M3.
(d) M4:
M4 concept of money is broader than M3. Besides all components of M3, it includes savings with the post offices (other than those in the form of National Savings Certificate
M4= M3 + Savings with the post offices (other than those in the form of National Savings Certificates).
Q.2. What role of RBI is known as ‘lender of last resort’? Explain.
Ans. i. Whenever commercial banks face problem in meeting obligations of their depositors, the central bank helps them by advancing necessary credit against eligible securities on certain terms and conditions. This faculty from central bank saves the banks from failure.
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ii. Central Bank never refuses to accommodate the eligible banks and helps them in difficult circumstances.
iii. That is why central bank is known as lender of last resort’.
iv. This function of central bank is its most important function.
v. In Central Banking System, when all other options seem to be closed for a bank in distress, it sends SOS to the central bank as “the lender of last resort”; hence this name given to RBI’s role as saviour.