Q. Consider the following financial assets and their corresponding liquidity aggregates:
1.Demand Deposits of Banks: Included in M1
2.Post Office Savings Deposits: Included in M2 but not M3
3.Certificates of Deposit (CDs): Included in the higher liquidity aggregates L2 and L3
Which of the above pairs is/are correctly matched in the decreasing order of liquidity (from high to low)?
Explanation:
The money aggregates M1,M2,M3,M4 and liquidity aggregates L1,L2,L3 are arranged in decreasing order of liquidity, where M1 is the most liquid and L3 is the least.
Statement 1: Correct. Demand deposits are part of M1 (Narrow Money), which is the most liquid component after Currency with Public.
Statement 2: Correct. M2=M1+ Savings Deposits of Post Office Savings Banks. M3 is M1+ Net Time Deposits of Banks and generally does not include Post Office Deposits (in the older aggregation), which are primarily included only in M2 and M4.
Statement 3: Correct. Certificates of Deposit (CDs), being time deposits, are not part of narrow money (M1). They are included in L2 and L3, the broadest liquidity measures, signifying their lower liquidity compared to M3. (Note: In the new monetary aggregates (NM1, NM2, NM3), term deposits are included in NM2 and NM3, which are less liquid than NM1).
