Money Supply and Its Components
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Questions and Answers

What is the primary difference between the definitions of M2 and M3?

  • M3 includes savings deposits of post office savings banks, while M2 does not (correct)
  • M2 includes currency with the public, while M3 does not
  • M2 includes time deposits with the banking system, while M3 does not
  • M3 includes currency with the public, while M2 does not

    • What is excluded from the definition of 'public' in the context of money supply?

  • Local authorities and non-banking financial institutions
  • Foreign central banks and governments
  • Households and firms
  • The government and the banking system (correct)

    • What type of deposits are included in the definition of M1?

  • Demand deposits with the banking system (correct)
  • Money market fund shares and debt securities
  • Savings deposits and repurchase agreements
  • Demand deposits and time deposits

    • Which of the following is NOT included in the definition of broad money (M3)?

    <p>Deposits with an agreed maturity of up to five years</p> Signup and view all the answers

    Which institution is included in the definition of 'banking system'?

    <p>All banks that accept demand deposits</p> Signup and view all the answers

    What is the primary difference between demand deposits and time deposits?

    <p>Time deposits have a longer maturity period</p> Signup and view all the answers

    What happens to excess reserves when banks expect an increase in deposit outflows?

    <p>They increase to provide more assurance against the possibility</p> Signup and view all the answers

    What is the primary reason for the decline in excess reserves when expected deposit outflows decrease?

    <p>Banks no longer need to hold excess reserves as a precaution</p> Signup and view all the answers

    What is the effect of banks converting deposits into currency on the creation of credit money?

    <p>It decreases the creation of credit money</p> Signup and view all the answers

    What is the primary reason for the sharp deceleration in monetary growth during times of financial crises?

    <p>Banks become unwilling to lend to small and medium scale industries</p> Signup and view all the answers

    What is the effect of a decline in expected deposit outflows on the monetary base?

    <p>It increases the monetary base</p> Signup and view all the answers

    What is the primary reason for the variation in money supply over time?

    <p>The behaviour of commercial banks</p> Signup and view all the answers

    What is the primary reason why the money multiplier and the deposit multiplier are not identical?

    <p>Banks maintain reserves at a level above the minimum required reserve.</p> Signup and view all the answers

    What happens to excess reserves when banks are risk averse to lending?

    <p>They are parked under reverse repo.</p> Signup and view all the answers

    What is the outcome when banks create money through credit?

    <p>An expansion of money not backed by money proper.</p> Signup and view all the answers

    What is the relationship between the type of money created by commercial banks and that issued by the central bank?

    <p>They are identical.</p> Signup and view all the answers

    What happened to the average deposit of funds in the overnight reverse repo window in India during the COVID pandemic?

    <p>It increased more than three times.</p> Signup and view all the answers

    What is the primary reason why banks maintain reserves above the minimum required reserve?

    <p>To reduce their risk exposure.</p> Signup and view all the answers

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