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BROAD MONEY CONCEPT | AFM JAIIB MAY 2023

BROAD MONEY CONCEPT | AFM JAIIB MAY 2023

 

Here we discuss one of the essential concepts of the JAIIB exam MAY 2023 Broad Money and our JAIIB study material MAY 2023.

 

JAIIB EXAM NOV 2022 ELIGIBILITY AND DATES

Only regular members of the Institute may apply for the flagship course known as JAIIB or Junior Associate of the Indian Institute of Bankers. The JAIIB Exam MAY 2023 aims to provide the appropriate level of fundamental knowledge in banking and financial services, banking technology, customer relations, fundamental accounting, and legal elements for conducting daily banking operations. The candidate gains advantages in personal and professional realms with the JAIIB exam MAY 2023

After this, we would discuss the concept of Broad Money.

 

BROAD MONEY CONCEPT

The amount of money in circulation in an economy is measured using the concept of “broad money.” As the most comprehensive way to estimate a nation’s money supply, it takes into account both narrow money and other assets that are readily convertible into cash for the purchase of goods and services.

EXPLANATION:

It is difficult for economists to quantify the amount of money in circulation in the economy since cash can be converted into a wide variety of financial products. Different methods are used to gauge the money supply. To indicate the measurement they employ in a certain situation, economists use a capital “M” followed by a number.

 

Each nation uses a different formula to determine its money supply. The most inclusive measure, known as “broad money,” includes both narrow money (such as cash and checkable deposits) and less liquid assets like certificates of deposit, foreign currencies, money market accounts, marketable securities, Treasury bills, and anything else that can be quickly converted into cash (but not including company shares).

Broad money is the definition of the Money Supply which includes a wide scope for the definition of money – including both notes and coins, but also more illiquid forms of money – such as bank deposits, treasury bills, gilts. These are considered ‘near money’ because it can easily be changed to cash.

  • Narrow money is seen as the basic amount of notes and coins and operational deposits at Bank of England.
  • Broad money includes notes and coins but also saving accounts and deposits in a savings account.
  • Broad money can also include Treasury Bills and gilts. These financial securities are seen as ‘near money’ because they are more illiquid than cash and instant saving accounts.

Broad money does not include assets, such as long-term dated securities and shares. Although these can be sold, they are not included in terms of broad money because they fall in the category of assets rather than money.

 

ADVANTAGES OF BROAD MONEY

There are various benefits to expanding the amount of money in circulation overall. Above all, it aids in better understanding future inflationary patterns for policymakers. In order to determine their monetary policy, central banks frequently consider both broad and narrow money.

Money supply, inflation, and interest rates have been found to be closely correlated by economists. When the objective is to stimulate the economy, central banks like the RBI utilise lower interest rates to expand the money supply. In contrast, higher interest rates and a smaller money supply in an inflationary environment result in lower prices.

Simply put, the economy tends to grow faster when there is more money available because businesses have easier access to funding. Prices may drop or stagnate as the economy slows down if there is less money in circulation. Broad money is one of the metrics central bankers use to assess if they should make any actions to affect the economy in this situation.

 

BROAD MONEY AND M3 ARE ONE AND THE SAME

We use the word “broad money” loosely, although it basically means the same thing as “M3.”

Coins and bills, deposits made into savings and checking accounts, mini-time deposits, and non-institutional money market accounts are all included in M3. Overnight repos at commercial banks are also included in it. One of the types of short term borrowing is known as repo (repurchase agreement).

The primary indicator of the money supply is M3. In reality, it is the economic metric we use to assess the liquidity of an economy.

Broad money, though, might represent a variety of things. Depending on the context in which the term is used, different meanings apply. It typically has the same connotations as M3. However, it can also be used to describe only the least liquid types of currency.

To get a better understanding of broad money you should also know what narrow money means as then you can compare and have a clear picture of concepts in your mind.

 

NARROW MONEY

This category of supplied money comprises all forms of physical money, including coins, demand deposits, liquid assets owned by the central bank, and currency. As we previously said, different countries utilize different definitions of money in their central banks and governments. But there is a certain amount of restricted money in every nation. A letter or numeral is followed by a M to indicate narrow money.

Here are some instances of how “narrow money” is recognised in various countries:

  • Narrow money is categorised as M0 and M1 in Canada. It comprises items easily convertible into cash as well as current bills and coins.
  • The two main money measures in the United States are M1 and M2, with M1 being the narrowest. In the US, all forms of legal tender, demand deposits, traveler’s checks, and checkable deposits are considered narrow money (M1).
  • Narrow money is denoted as M1 in Australia. It is made up of current bank deposits, coins, and bills that are in use.
  • M1 is the smallest unit of money in the United Kingdom, and it consists of both the currency in circulation and bankers’ deposits. As narrow money, M2 and M4 follow closely.
  • M1 is the smallest unit of currency in Japan and consists of all deposits, coins, and bills in circulation. M2, which covers deposits, coins, bills in circulation, and certificates of deposits, comes in second place.

 

DIFFERENCES BETWEEN NARROW MONEY AND BROAD MONEY

  • Definition

Narrow money falls into the category of “broad money,” along with other assets that are readily convertible into cash, including foreign currencies, certificates of deposit, money market accounts, treasury bills, and marketable securities. Contrarily, narrow money is a category of given money that comprises all forms of physical money, including coins, demand deposits, liquid assets owned by the central bank, and currency.

  • Liquidity

While narrow money is very liquid, broad money is less so.

  • Indication

M0, M1, or M2 are used to denote narrow money, whereas M3 or M4 are used to denote broad money.

Now that we are done discussing the broad money concept, we would like to move on with our JAIIB study material MAY 2023.

 

JAIIB STUDY MATERIAL MAY 2022

At Learning sessions, we provide you with the most trusted JAIIB study material for MAY 2023 compiled by our experts. We offer various services such as:

  • Live and recorded video lessons of all the topics of the JAIIB exam MAY 2023.
  • Both Hindi and English languages are used for your better understanding.
  • Complementary short notes in the form of epdfs which can be accessed on our apps.
  • JAIIB mock tests for MAY 2023 are available for you to practice.

 

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