Business Economics · Money Market

Measures of Money Supply (M1, M2, M3, M4) for CA Foundation

Q: What is the difference between M1 and M3 money supply?

M1 is narrow money: currency with the public, demand deposits with banks and other deposits with the RBI. M3 is M1 plus time deposits with banks. So M3 is broader and includes less liquid money.

Q: What do narrow money and broad money mean?

Narrow money is M1, the most liquid money that can be spent immediately. Broad money is a wider measure, mainly M3, that also includes time deposits. M4 is wider still.

Q: Which measure of money supply is the most liquid?

M1 is the most liquid because it consists of currency and deposits that can be withdrawn on demand. Liquidity falls as you move towards M4.

Q: Has the RBI changed its money supply measures?

Yes. The RBI has revised and reorganised its published series over the years, using labels such as NM1, NM2 and NM3. For CA Foundation, use the M1 to M4 definitions in your study material unless the question gives different ones.

Updated 1 October 2026 · Fact-checked

Money supply is the total money held by the public. The RBI groups it into M1, M2, M3 and M4, from most liquid to least. M1 is currency plus demand deposits plus RBI's other deposits. Each wider measure adds less liquid items. To solve questions, add the listed components in order.

Understand Measures of Money Supply (M1, M2, M3, M4)

Money supply is the stock of money held by the public at a point in time. It does not include cash held by the government or by banks themselves. Economists need to measure it because it affects prices, interest rates and growth.

The difficulty is that "money" is not one thing. A ₹500 note can be spent at once. A 3-year fixed deposit must first be broken or encashed. So the RBI measures money in layers, called monetary aggregates. Each layer adds assets that are less liquid than the one before.

Narrow money is M1. It holds the most liquid forms: currency with the public, demand deposits with banks, and other deposits with the RBI. Broad money means the wider aggregates, mainly M3 and M4, which add time deposits and post office deposits.

The classic ladder used in the syllabus is:
- M1 = currency with public + demand deposits with banks + other deposits with RBI
- M2 = M1 + savings deposits with post office savings banks
- M3 = M1 + time deposits with banks
- M4 = M3 + total post office deposits (excluding National Savings Certificates)

M3 is the most widely used measure of broad money. Note that the RBI has since reorganised its published series (it uses labels like NM1, NM2 and NM3 and has revised definitions over time). For the exam, answer using the M1 to M4 definitions above unless the question gives its own data or definition.

Key formulas to remember

M1 (narrow money): M1 = Currency with public + Demand deposits with banks + Other deposits with RBI; Most liquid measure. Currency means notes and coins held by the public, not by banks.
M2: M2 = M1 + Savings deposits with post office savings banks; Adds only post office savings deposits to M1.
M3 (broad money): M3 = M1 + Time deposits with banks; Also called aggregate monetary resources. M3 builds on M1, not on M2.
M4: M4 = M3 + Total post office deposits (excluding NSCs); Widest and least liquid of the four.
Liquidity order: M1 is the most liquid; M4 is the least liquid; M1 < M2, M1 < M3 and M3 < M4 always hold. M2 and M3 both branch from M1, so M3 is not built on M2. Compare M2 and M3 from the data.

How to solve Measures of Money Supply (M1, M2, M3, M4) questions

Most questions either ask what a measure includes or ask you to compute one from given figures. Use the same method for both.

1Read the question and mark which measure is asked: M1, M2, M3 or M4.
2Write the definition of that measure from memory, starting from M1.
3List the given figures and match each one to a component. Ignore items that do not belong, such as bank cash or government deposits.
4Check the base: M2 and M3 both start from M1. M4 starts from M3. Post office savings deposits are added in M2, and total post office deposits are added in M4.
5Add the matching components carefully and keep the units (₹ crore) the same.
6If a later measure is asked, build it from the earlier one you already computed.
7Compare your answer with the options and check that it fits the liquidity order, for example M4 must exceed M3.

Quickest way: Build-up chain and one-word memory

When to use it: Use for every MCQ on this topic. It takes under a minute.

Remember the keywords: M1 = cash + demand; M2 = M1 + post office savings; M3 = M1 + time deposits; M4 = M3 + all post office deposits.
For conceptual MCQs, ask: is the item instantly spendable? If yes, it belongs in M1. If it is a term deposit with a bank, it first appears in M3. Post office savings deposits are added in M2, and total post office deposits are added in M4.
For numerical MCQs, compute M1 first, then add only what the question asks.
Eliminate options that break the order, such as an M4 value smaller than the M3 value.
Eliminate options that match common wrong sums, such as adding time deposits to M2 to get M3. If still unsure, skip it, since each wrong answer costs 0.25 marks.

Common mistakes in Measures of Money Supply (M1, M2, M3, M4)

Building M3 on top of M2.
The numbering suggests each measure simply adds to the one before it.
Fix: Remember M3 = M1 + time deposits. M2 and M3 both branch from M1. Only M4 builds on M3.
Treating M2 as larger than M3 or in a strict chain with it.
Students assume M1 < M2 < M3 < M4 as a strict chain, because the numbers suggest it.
Fix: M2 and M3 both branch from M1, so M3 is not built on M2. M1 < M2 and M1 < M3 < M4 always hold. Compare M2 and M3 from the data.
Including cash held by banks or the government in currency with public.
The word currency is read as all notes in the economy.
Fix: Only currency held by the public counts. Cash in bank vaults and government balances are excluded.
Calling savings deposits with banks part of narrow money.
Savings accounts feel as liquid as current accounts.
Fix: In the classic M1, demand deposits (such as current account balances) count, and bank savings deposits are not listed as a separate component. Use only the components the question lists under M1, and do not add post office items.
Including National Savings Certificates in M4.
Students remember that M4 uses post office deposits and assume all of them count.
Fix: M4 uses total post office deposits excluding NSCs.
Mixing up narrow money and broad money.
Both terms sound like descriptions of size only.
Fix: Narrow money is M1 (highly liquid). Broad money means wider aggregates such as M3 and M4.

Worked examples

Example 1

Data (₹ crore): currency with public 2,000; demand deposits with banks 3,000; other deposits with RBI 100; time deposits with banks 5,000; post office savings deposits 400; total post office deposits 700. What is M3? (a) ₹5,100 crore (b) ₹10,100 crore (c) ₹10,500 crore (d) ₹10,800 crore

Show the solution

M3 = M1 + time deposits with banks.
M1 = 2,000 + 3,000 + 100 = 5,100.
M3 = 5,100 + 5,000 = 10,100.
Option (a) is only M1. Option (c) wrongly adds the post office savings deposits to M3. Option (d) is M4, found as 10,100 + 700.

Answer: (b) ₹10,100 crore

Example 2

Which of the following is included in M3 but NOT in M1? (a) Currency with the public (b) Demand deposits with banks (c) Time deposits with banks (d) Other deposits with the RBI

Show the solution

M1 has currency with public, demand deposits with banks and other deposits with RBI.
So options (a), (b) and (d) are all in M1.
M3 = M1 + time deposits with banks, so time deposits are the extra item.

Answer: (c) Time deposits with banks

Example 3

M1 is ₹6,000 crore, time deposits with banks are ₹9,000 crore and total post office deposits (excluding NSCs) are ₹1,500 crore. What is M4? (a) ₹7,500 crore (b) ₹10,500 crore (c) ₹15,000 crore (d) ₹16,500 crore

Show the solution

M3 = M1 + time deposits = 6,000 + 9,000 = 15,000.
M4 = M3 + total post office deposits = 15,000 + 1,500 = 16,500.
Option (a) is M1 + post office deposits (skips time deposits). Option (b) is time deposits + post office deposits (skips M1). Option (c) is M3 only (skips post office deposits).

Answer: (d) ₹16,500 crore

Exam tips

Questions are usually either definition-based (which item belongs where) or simple addition. Learn the four formulas exactly.
Watch the words "narrow money" (M1) and "broad money" (M3 or M4). Examiners swap them as distractors.
Check whether the question asks for M3 or M4. The same data set can be used for both, and options often include both values.
If the question gives its own definition of a measure, follow it over what you remember.
Skip only if you cannot recall a definition. A wrong answer costs 0.25 marks, but a guess between two options is reasonable.

Practice questions from Money Market

Measures of Money Supply (M1, M2, M3, M4): frequently asked questions

What is the difference between M1 and M3 money supply?

M1 is narrow money: currency with the public, demand deposits with banks and other deposits with the RBI. M3 is M1 plus time deposits with banks. So M3 is broader and includes less liquid money.

What do narrow money and broad money mean?

Narrow money is M1, the most liquid money that can be spent immediately. Broad money is a wider measure, mainly M3, that also includes time deposits. M4 is wider still.

Which measure of money supply is the most liquid?

M1 is the most liquid because it consists of currency and deposits that can be withdrawn on demand. Liquidity falls as you move towards M4.

Has the RBI changed its money supply measures?

Yes. The RBI has revised and reorganised its published series over the years, using labels such as NM1, NM2 and NM3. For CA Foundation, use the M1 to M4 definitions in your study material unless the question gives different ones.