Question

Sumit deposited ₹ 10 lakh in his savings account. The deposits made by him is a part of ____________ in the \(M_1\) measure of money supply.

• A. Currency held by public
• B. Interbank deposits
• C. Demand deposits with commercial banks
• D. Term deposits with Reserve Bank of India (RBI)

Hint:

Savings accounts are treated as demand deposits because they are withdrawable on demand, hence included in \(M_1\).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
\(M_1\) is the most liquid measure of money supply. It consists of:
\(M_1 = C + DD + OD\)
Where:
\(C\) = Currency and coins with the public.
\(DD\) = Demand deposits of the public with commercial banks.
\(OD\) = 'Other' deposits with the RBI.
Step 2: Detailed Explanation:
Savings account deposits are considered "Demand Deposits" because the depositor can withdraw them at any time using cheques, ATMs, or transfers.
Interbank deposits (money banks keep with each other) are excluded from the money supply to avoid double counting.
Term deposits (Fixed Deposits) are not part of \(M_1\) as they have a fixed maturity period.
Step 3: Final Answer:
The deposit in a savings account falls under the category of Demand Deposits with commercial banks.