What is Narrow Money?
Narrow money is a measurement of the money supply with only the most liquid forms, such as cash and highly liquid bank deposits. It is also known as M0 or M1, depending on the country. Narrow money is useful for understanding the availability of funds for immediate transactions and for analyzing short-term economic trends.
Narrow Money Explained
Narrow money is a part of the money supply that consists of the most liquid form of money in an economy. It includes notes, coins, and any deposits that people have in their banks. However, foreign currencies are not included in this category.
Narrow money is the only option for everyday transactions. No other type of money can match narrow money in terms of its immediate use, whether it is paying cash for goods or writing a check for a worker. This easy access makes it very liquid.
In a real-life situation, any form of cash that is used to buy things will be counted as narrow money. It does not matter where it is stored in the wallet, purse, or under the sofa. The main thing is that the money is circulating, and it does not matter who gets it after buying things.
Note that people who keep demand or checking deposits in their banks are also in this category. This is because people can withdraw them or write a check whenever they want. They are as liquid as notes and coins and belong to this class.
Example of Narrow Money
Currency with the public: This includes all the notes and coins that individuals, businesses, and the government hold.
Demand deposits with banks: These deposits, such as checking and current accounts, can be withdrawn or transferred on demand.
Other deposits with the RBI: Deposits held by the Central Bank of India, such as inter-bank deposits and deposits of foreign governments.