M3 is defined as:

Question

M3 is defined as:

Accepted Answer

The correct option is 4:
M3, often referred to as Broad Money, is a widely used measure of the money supply in an economy. As per the Reserve Bank of India (RBI) definitions, M3 includes M1 plus the net time deposits of commercial banks. M1 represents the most liquid form of money (currency with the public, demand deposits with banks, and other deposits with the RBI). By adding time deposits (such as fixed deposits, which are less liquid than demand deposits) to M1, M3 captures a broader spectrum of financial assets that can potentially serve as money, making it a critical indicator for monetary policy formulation and economic analysis.

The incorrect option is 1:
M1 + demand deposits with banks is redundant and incorrect. M1 already includes demand deposits (current and saving accounts) with commercial banks, along with currency and other deposits with the RBI. Therefore, adding demand deposits again does not correctly define any standard money supply measure.

The incorrect option is 2:
M1 + deposits of post office saving banks actually defines M2. M2 is a slightly broader measure of money than M1, but it specifically incorporates the savings deposits held with post office savings banks, distinguishing it from M3 which focuses on commercial bank time deposits.

The incorrect option is 3:
M2 + time deposits of the banks is inaccurate because M3 is defined directly in relation to M1, not M2, in terms of composition. Furthermore, the combination M2 + time deposits of the banks would incorrectly double-count certain components or include non-bank assets that are already categorized in M2 but not relevant to the M3 definition.