Broad and Narrow Money: What’s the Difference? | UPSC Economics

Broad and Narrow Money are the different aspects of the economy. They are the amount of money in circulation in a given economy. 

Broad Money is an aspect that refers to the amount of money that flows in a given economy. It is a method of determining a country’s money supply. Broad money is closely monitored by central banks in order to forecast inflation. 

Broad money includes certificates of deposit, foreign currencies, money market accounts, marketable security, and others. M3 and M4 come under Broad Money. M3 is made up of the currency with the public, current deposits, saving deposits, and certificates of deposits that are issued by the banking system. On the other hand, M4 is the sum of M3 money and deposits with postal savings banks. 

Narrow Money is an aspect of money supply that includes coins and currency, demand deposits, and liquid assets. The Narrow Money is represented by M1 and M0. They form the basis for the economy’s medium of exchange. The major examples of Narrow money are Physical Cash that is available to an individual and the demand deposit in the bank. 

 M1 is made up of currency with the public, current deposits with the Banking system, and other deposits with RBI. It covers the money held by the public as well as bearing deposits held by the banks. 

The difference between Broad and Narrow Money is quite simple. Narrow Money has a high level of liquid money and it is available for transactions, and broad money has lower liquid cash. 

The Broad and Narrow Money measures help us to understand the money supply in the economy. They are calculated regularly by RBI which helps to manage inflation and interest rates

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