Which of the following statement is incorrect regarding money supply?

Q: Which of the following statement is incorrect regarding money supply?

Which of the following statement is incorrect regarding money supply?

Question

Accepted Answer

The correct option is 4: M4 being the most liquid measure of money supply.

The question asks for the **incorrect** statement regarding money supply. The money supply aggregates (M1, M2, M3, M4) are differentiated based on their liquidity. Liquidity refers to the ease with which an asset can be converted into cash. M1 is the narrowest and most liquid measure, including currency and demand deposits. As we move from M1 to M4, less liquid assets (like time deposits and total deposits with the post office) are added, meaning liquidity decreases. Therefore, M4 is the least liquid measure of money supply, not the most liquid. Since this statement contradicts the established order of liquidity in money supply aggregates, it is the incorrect statement, making Option 4 the correct answer to the question.

The incorrect option is 1: The supply of money is a stock variable.
This statement is correct. A stock variable is measured at a specific point in time (e.g., as of March 31st), whereas a flow variable is measured over a period of time (e.g., GDP over a year). Money supply (the total amount of money available in an economy) is always measured at a particular point in time, hence it is a stock variable.

The incorrect option is 2: The supply of money does not have any time dimension.
This statement is correct, which is inherent in the definition of a stock variable. Since the money supply is measured at a specific instant, like an inventory count, it does not require a time dimension (such as "per month" or "per year") for its measurement.

The incorrect option is 3: M3 is the most widely used measure of money supply.
This statement is generally correct, particularly in the context of Indian economy and many central banks. M3, known as Broad Money, includes M1 plus net time deposits of commercial banks. It is often the preferred and most commonly cited measure for analyzing macroeconomic variables like inflation and credit, as it captures a large portion of the money circulating in the economy.