| With reference to narrow money, consider the following statements: |
| 1. They are highly liquid. |
| 2. Banks run their lending programme mainly with this money. Which of the statements given above is/are correct? |
A) 1 only
B) 2 only
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: A
Solution :
[a] Narrow money = currency with public + demand deposit with banks + "other' deposits with RBI. It is denoted by M 1. It is highly liquid. Now, banks cannot carry their lending program with such highly liquid money as they have to return it pay when required by depositor. For eg. demand deposit is a part of Ml. Banks have to return the demand deposit immediately if the depositor demands it. But if bank had lent that money to others, it cannot return it. So, the lending program is mainly carried by such money which is less liquid, like broad money (M3).
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