Tags: - Quick Facts For Prelims
- GS Paper - 3
Why in News?
Nearly six years and two months after the government announced demonetisation in 2016, currency with the public is at a new high (74% increase from the days before demonetisation was announced).
- Currency with the public is arrived at after deducting cash with banks from total Currency in Circulation.
- Cash in the system has been steadily rising, even though the government and the Reserve Bank of India (RBI) pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions.
What is Currency in Circulation?
- Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.
- Currency in circulation is an important component of a country's money supply.
- Monetary authorities of central banks pay attention to the amount of physical currency in circulation because it represents one of the most liquid asset classes.
- Currency in Circulation includes notes in circulation, rupee coins and small coins.
- The RBI has the sole right to issue currency notes. The Government of India is the issuing authority of coins and supplies coins to the Reserve Bank on demand.
What is Money Supply?
- The total stock of money in circulation among the public at a particular point of time is called money supply.
- It needs to be noted that total stock of money is different from total supply of money.
- Supply of money is only that part of total stock of money which is held by the public at a particular point of time.
- The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.
- RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
- M1 = CU + DD
- M2 = M1 + Savings deposits with Post Office savings banks
- M3 = M1 + Net time deposits of commercial banks
- M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
- CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
- The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply.
- The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
- M1 and M2 are known as narrow money. M3 and M4 are known as broad money.
- These gradations are in decreasing order of liquidity.
- M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
- M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.
UPSC Civil Services Examination, Previous Year Questions (PYQs)
Q1. Which of the following measures would result in an increase in the money supply in the economy? (2012)
- Purchase of government securities from the public by the Central Bank
- Deposit of currency in commercial banks by the public
- Borrowing by the government from the Central Bank
- Sale of government securities to the public by the Central Bank
Select the correct answer using the codes given below:
(a) 1 only
(b) 2 and 4 only
(c) 1 and 3 only
(d) 2, 3 and 4
Ans: (c)
- In case of public depositing money with the central bank and government selling its securities to the public, the money supply in the economy decreases. Hence, 2 and 4 are not correct.
- Ways to Increase the Money Supply in the Economy
- Printing more money;
- Reducing interest rates;
- Quantitative easing;
- Reduce the reserve ratio for lending;
- Central Bank buying government securities; hence, 1 is correct.
- Expansionary fiscal policy;
- The borrowing by the government from the Central Bank also results in an increase in money supply in the economy. Hence, 3 is correct. Therefore, option (c) is the correct answer.
Q2. If you withdraw `1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be (2020)
(a) to reduce it by `1,00,000
(b) to increase it by `1,00,000
(c) to increase it by more than `1,00,000
(d) to leave it unchanged
Ans: (d)
Source: IE
FAQs
What Is Currency in Circulation? Currency in circulation refers to the amount of cash–in the form of paper notes or coins–within a country that is physically used to conduct transactions between consumers and businesses.
How much money is currently in circulation? ›
Basic Info. US Currency in Circulation is at a current level of 2.348T, down from 2.349T last week and up from 2.333T one year ago. This is a change of -0.03% from last week and 0.64% from one year ago.
Is currency in circulation part of M1 M2 or both? ›
The Relationship between M1 and M2 Money. M1 and M2 money have several definitions, ranging from narrow to broad. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks. M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.
What is currency in circulation deposits? ›
More broadly, money in circulation is the total money supply of a country, which can be defined in various ways, but always includes currency and also some types of bank deposits, such as deposits at call. The published amount of currency in circulation tends to be overstated by an unknown amount.
How much actual cash is in the US? ›
The total value of currency in circulation in the United States amounted to roughly 2.26 trillion U.S. dollars in 2022, which was a slight increase compared to the previous year.
What backs the money supply in the United States? ›
Government backs the money supply.
In the United States, the money supply is backed up by the government, which guarantees to keep the value of the money supply relatively stable.
Is bitcoin M1 or M2? ›
Because Bitcoin can be used to purchase goods and services immediately, it would be included in M1 and would cause M1 to rise. Also, as discussed above, everything in M1 is included in M2, so if M1 rises, so will M2.
What backs the currency in circulation in the United States? ›
So dollars in circulation are directly backed by government debt. However, it is important to realize that physical currency is only a tiny portion of the total money supply. This is because most money is created by commercial banks, not the Federal Reserve.
What is the most stable currency on earth? ›
What is the safest currency in the world? The Swiss franc (CHF) is generally considered to be the safest currency in the world and many investors consider it to be a safe-haven asset. This is due to the neutrality of the Swiss nation, along with its strong monetary policies and low debt levels.
What is the weakest currency in the world? ›
What Is the Weakest Currency in the World? The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
Japan continues to be a popular choice, but Vietnam and South Korea stand as solid alternatives among numerous countries in Asia with favourable exchange rates for the US dollar. Closely following in value are South American countries: Argentina and Chile are among those offering the biggest luxury bang.
Is currency in circulation M1 or M2? ›
M1 and M2 money are the two mostly commonly used definitions of money. M1 = coins and currency in circulation + checkable (demand) deposit + traveler's checks + saving deposits. M2 = M1 + money market funds + certificates of deposit + other time deposits.
How many $10,000 dollar bills are there? ›
There are estimates that fewer than 350 $10,000 bills remain in circulation today. Further, there are only eight known 1928 bills known to still exist, two of which are owned by museums. This has vastly inflated the value of the bill.
What is the US dollar backed by today? ›
Fiat standard
Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.
How much money is currently in existence? ›
The global M1 supply, which includes all the money in circulation plus travelers checks and demand deposits like checking and savings accounts, was $48.9 trillion as of Nov. 28, 2022, according to Visual Capitalist. That publication estimated the total value of the M2 supply to be $82.6 trillion.
How much money is in circulation on Earth? ›
According to the personal finance website GOBankingRates, there's ~$8.28 trillion worth of paper notes and coins in circulation in the world. Per the outlet, this number is based on a 2021 estimate from the Bank for International Settlements.
How many $1 are in circulation? ›
In 2022, there was a total of 54.1 billion U.S. dollar notes in circulation, almost one billion more than in the previous year. Out of the 54.1 billion, 18.5 billion were 100 dollar bills, which had the highest volume in circulation. It was followed by the one dollar bill, with 14.3 billion in circulation.
What is the amount of money in circulation in an economy? ›
Currency in circulation is the amount of money that has been issued by monetary authorities minus currency that has been removed from an economy. Currency in circulation is an important component of a country's money supply.
