Match the following terms with their descriptions: Pair | Term | Description 1. | Narrow Money | M1 and M2 2. | Broad Money | M3 and M4 3. | Reserve Money | Currency issued by Central Bank 4. | Fiat Money | Currency backed by gold reserves Which of the pairs given above are correctly matched?

The correct Answer is 1, 2 and 3 only Explanation Monetary aggregates are measures of the money supply in an economy. These aggregates are classified based on their liquidity, ranging from narrow money (most liquid) to broad money (less liquid). Reserve money represents the monetary base. Fiat money is a type of currency. Statement-wise Analysis 1. Statement 1: Narrow Money - M1 and M2 Incorrect. Narrow money typically refers to M1. M1 includes currency with the public, demand deposits with banks, and other deposits with the RBI. M2 includes M1 plus savings deposits of post office savings banks. While M1 is considered narrow money, M2 is often considered a broader measure than M1, but still part of the narrow money concept in some classifications, or an intermediate measure. However, in the most common, M1 is strictly narrow money. The pairing of M1 and M2 as "Narrow Money" is not entirely precise as M2 incorporates less liquid components than M1. 2. Statement 2: Broad Money - M3 and M4 Correct. Broad money refers to M3 and M4. M3 includes M1 plus time deposits with banks. M4 includes M3 plus all deposits with post office savings organizations (excluding National Savings Certificates). M3 is the most commonly used measure of money supply in India. 3. Statement 3: Reserve Money - Currency issued by Central Bank Correct. Reserve money (M0) is also known as high-powered money or the monetary base. It consists of currency in circulation (currency with the public and cash in banks) and bankers' deposits with the RBI, and 'other' deposits with the RBI. The currency issued by the Central Bank (RBI in India) forms the primary component of reserve money. 4. Statement 4: Fiat Money - Currency backed by gold reserves Incorrect. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. Its value is derived from government decree. Currency backed by gold reserves is characteristic of a gold standard system, not fiat money. Modern currencies are typically fiat money. Key Takeaway Monetary aggregates (M1, M2, M3, M4) classify money supply based on liquidity, with M1 being narrow money and M3/M4 being broad money; Reserve Money is the monetary base, and Fiat Money is government-decreed legal tender not backed by commodities.

Match the following terms with their… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 5: Money and Banking

mcqmedium

Match the following terms with their descriptions:

Pair	Term	Description
1.	Narrow Money	M1 and M2
2.	Broad Money	M3 and M4
3.	Reserve Money	Currency issued by Central Bank
4.	Fiat Money	Currency backed by gold reserves

Which of the pairs given above are correctly matched?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 13

Options

A1 and 2 only
B1, 2 and 3 only
C3 and 4 only
D1, 2, 3 and 4

Did you get this right?

Solution

The correct Answer is 1, 2 and 3 only

Explanation

Monetary aggregates are measures of the money supply in an economy. These aggregates are classified based on their liquidity, ranging from narrow money (most liquid) to broad money (less liquid). Reserve money represents the monetary base. Fiat money is a type of currency.

Statement-wise Analysis

Statement 1: Narrow Money - M1 and M2
Incorrect. Narrow money typically refers to M1. M1 includes currency with the public, demand deposits with banks, and other deposits with the RBI. M2 includes M1 plus savings deposits of post office savings banks. While M1 is considered narrow money, M2 is often considered a broader measure than M1, but still part of the narrow money concept in some classifications, or an intermediate measure. However, in the most common, M1 is strictly narrow money. The pairing of M1 and M2 as "Narrow Money" is not entirely precise as M2 incorporates less liquid components than M1.
Statement 2: Broad Money - M3 and M4
Correct. Broad money refers to M3 and M4. M3 includes M1 plus time deposits with banks. M4 includes M3 plus all deposits with post office savings organizations (excluding National Savings Certificates). M3 is the most commonly used measure of money supply in India.
Statement 3: Reserve Money - Currency issued by Central Bank
Correct. Reserve money (M0) is also known as high-powered money or the monetary base. It consists of currency in circulation (currency with the public and cash in banks) and bankers' deposits with the RBI, and 'other' deposits with the RBI. The currency issued by the Central Bank (RBI in India) forms the primary component of reserve money.
Statement 4: Fiat Money - Currency backed by gold reserves
Incorrect. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. Its value is derived from government decree. Currency backed by gold reserves is characteristic of a gold standard system, not fiat money. Modern currencies are typically fiat money.

Key Takeaway

Monetary aggregates (M1, M2, M3, M4) classify money supply based on liquidity, with M1 being narrow money and M3/M4 being broad money; Reserve Money is the monetary base, and Fiat Money is government-decreed legal tender not backed by commodities.

Your note

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