When people hold more currency in hand and less in deposits, the currency-deposit ratio increases. The money multiplier, which determines the total money supply in the economy based on the monetary base, is inversely related to the currency-deposit ratio. Specifically, the simple money multiplier formula is (1+c)/(c+r), where c is the currency- deposit ratio and r is the reserve-deposit ratio. An increase in 'c' directly reduces the value of the money multiplier.
Currency with the public Notes and coins held by the public. 2. Demand deposits Deposits held by the public with commercial banks and co-operative banks that are withdrawable on demand (e.g., savings accounts, current accounts). 3. 'Other' deposits with Reserve Bank of India Demand deposits with RBI of entities other than banks and the government (e.g., deposits of quasi-government institutions, international financial institutions like IMF). 4. Banker's deposits with Reserve Bank of India Deposits of commercial banks with the RBI, which form a part of the reserves maintained by banks. These are included in the definition of M0 (Reserve Money) but not M1 in the standard Indian monetary aggregates. 532. What would be the impact on the economy if people start holding more currency in hand and less in deposits ?
Asked in UPSC CDS 2 2023 · Topic: Money & Banking (Money: Functions, Forms, and Measures of Money Supply)
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