Macroeconomics Case Study

Demand for and Supply of Money: A Case of India

OR

Abstract:
This case study primarily helps in understanding the estimation/calculation of money supply in an economy. This case also helps in analysing the determinants of money supply and the interrelations between those determinants, apart from understanding various theories relating to money demand and supply along with theories on monetary policies.

In economics, money is a broad term that refers to any financial instrument that can fulfil the functions of money – a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. Money supply is usually measured as three escalating categories: M1 (most liquid financial instruments), M2 (equals to M1 + and savings account deposits), and M3 (M2 plus time deposits). It helps in understanding the theories relating to supply for and demand of money in the light of changes in money supply in India in the period 1990 to 2008. The case also helps in analysing income velocity of money with the data provided.

Pedagogical Objectives:

• To understand the connotations of supply for and demand of money – Broad Money and Narrow Money – and the constituents thereof – M1, M2, M3
• TTo analyse the nature of relationship between money and other monetary and fiscal policy variables
• To understand how demand for and supply of money in India can be calculated and discuss on the implications thereof for the economy.

Keywords : demand and supply, medium of exchange, money demand and supply, liquid financial instruments), money supply in India, income velocity, Broad Money and Narrow Money, M1, M2, M3