RAS question
The difference between narrow money (M1) and broad money (M3) is:
Correct answer: (C) M3 includes time deposits of banks which M1 does not.
Broad money M3 differs from narrow money M1 because M3 includes time deposits with the banking system, while M1 does not.
Explanation
RBI defines M1 as currency with the public, demand deposits with the banking system, and 'other' deposits with the RBI. M3 is defined as M1 plus time deposits with the banking system. That extra component is the whole distinction tested here: M1 captures the more immediately usable part of money supply, while M3 widens the aggregate by adding bank time deposits. M3 is India's most commonly used money-supply measure and is called aggregate monetary resources. Therefore, option C is right because it identifies the element present in M3 but absent from M1.
Why the other options are wrong
- (A) M3 does not exclude currency in circulation because RBI defines it as M1 plus time deposits, and M1 includes currency with the public.
- (B) There is a defined difference: M3 adds time deposits with the banking system to the components already included in M1.
- (D) This reverses the relationship, since time deposits are included in M3, not in M1.
Concept
This tests the monetary aggregates part of Indian Economy, especially the composition of money supply measures. It recurs in RAS because M1 and M3 are standard RBI-defined aggregates used in questions on banking and monetary indicators.