Money can be measured differently based on either its actual physical quantity, or in terms of its impact on the economy. In that sense, a 100 Rupees note lying idle in a vault is less valuable that another 100 Rupees note that is changing many hands every day and spurring economic activity in the country.
Below are the common measures of money in the economy. These definitions can be a little confusing, in that case just remember this hierarchy
Currency in Circulation (CIC) < Reserve Money < Money Supply
Currency in Circulation (CIC)
It is the currency that is physically used to conduct transactions rather than stored in a bank, financial institution or central bank. It is total currency circulating in the public (not including deposits with commercial banks).
Reserve Money (or base money, monetary base, central bank money, M0)
It is composed of
- Bankers’ Deposits and other deposits with RBI.
- Currency in Circulation (CIC) (including vault cash).
Monetary base is called high-powered money because its increase will typically result in a much larger increase in the supply of demand deposits through banks’ loan making; a ratio called the money multiplier.
Money supply is the entire stock of currency and other liquid instruments circulating in a country’s economy. Money supply consists of the total currency circulating in the public plus the non-bank deposits with commercial banks. It should not be confused with the monetary base.
M0, M1, M2
M0: Monetary Base/ Reserve Money
M1 : Narrow money = Currency with public + demand deposits with banks
M2: Broad money = narrow money + time deposits
More related information:
Multiplier effect is the expansion of a country’s money supply that results from banks being able to lend.
A news from April 2018: Currency in Circulation in the economy has surpassed its pre-demonetisation levels. Currency with public has now reached around 96% of currency in circulation. This means that cash in hand (cash at ATM etc) with banks has declined. source – a SBI report on ATMs going out of cash in some states.