- A. to reduce it by Rs. 1,00,000
- B. to increase it by Rs. 1,00,000
- C. to increase it by more than Rs. 1,00,000
- D. to leave it unchanged
Answer: D
Explanation
There are 4 concepts of money supply: M1, M2, M3 and M4 1) M1 = C + DD + OD C- Is the currency held by the public. (Public money means that money which is held by everybody other than the government and the banks. It includes companies, general organisations, households. It does not include inter-bank or government deposits in banks) DD- Means net demand deposits with banks. ‘Net’ here indicates the deposits of only the public in banks. OD- Means other deposits.These are the deposits with the RBI, held by certain individuals and institutions • Individuals – like the former governors of the RBI • institutions- like IMF deposits 2) M3 = M1 + TD = C + DD + OD + TD (Broad money) ‘TD’ means time deposits M3 shows the total purchasing power in the economy. Therefore, when we say money supply in general, it means M3. So, normally, in newspapers etc. when the word money supply is used, it means M3 (Sometimes, M1 is also used- meaning 100% liquid money- but overall PP is shown by M3) Now, in the given case, while the ‘DD’ component will fall by Rs. 1,00,000, the ‘C’ component will increase by Rs. 1,00,000, thereby, leaving the money supply unchanged. Hence option (d) is the correct answer.