Introduction / Context:
Economists use different monetary aggregates such as M1, M2 and others to measure the money supply in an economy. M1, sometimes called narrow money, captures the most liquid forms of money that can be used immediately for transactions. Competitive exams often ask which items belong to M1 and which belong to broader aggregates. Understanding these categories helps in macroeconomics and monetary policy questions.
Given Data / Assumptions:
- The aggregate mentioned is M1, also known as narrow money.
- Options include savings deposits, credit card limits, checkable deposits, gold holdings and fixed deposits.
- We assume a standard definition where M1 covers currency in circulation and demand type deposits.
- The question focuses on identifying one correct component of M1.
Concept / Approach:
M1 usually consists of currency with the public plus demand deposits in banks and sometimes travellers cheques. Demand deposits and checkable deposits are funds that can be withdrawn on demand and used directly for payments, so they count as part of M1. Savings deposits, long term fixed deposits, gold and credit card limits are either less liquid or not money balances at all. Therefore, the correct answer must be checkable deposits.
Step-by-Step Solution:
Step 1: Recall that M1 includes the most liquid forms of money used for day to day transactions.
Step 2: Demand deposits that can be accessed by writing cheques or using debit cards are classic components of M1.
Step 3: Option c, checkable deposits, refers exactly to these demand deposits.
Step 4: Savings deposits in option a may have some restrictions on withdrawals and are more often counted in broader aggregates like M2.
Step 5: Credit card limits in option b represent potential borrowing power, not actual money balances, so they are not part of M1.
Step 6: Gold holdings in option d are physical assets and not a monetary deposit.
Step 7: Fixed deposits in option e are time deposits and are generally part of broader aggregates, not narrow money.
Verification / Alternative check:
A quick check is to ask which option allows immediate payment to others without converting into another form. Checkable deposits can be used directly through cheques or electronic transfers, which matches the concept of narrow money. The other options either require conversion, represent long term savings or are not money balances at all. This test of immediacy confirms checkable deposits as the correct answer.
Why Other Options Are Wrong:
Option a is wrong because savings deposits often have withdrawal limits and are typically grouped in broader monetary aggregates. Option b is incorrect since a credit card limit is an agreement with a bank to lend up to a certain amount, not an existing deposit of money. Option d is wrong because gold is a commodity, not a part of bank money supply aggregates. Option e, fixed deposits, are time bound and less liquid, so they fall under broader money, not M1.
Common Pitfalls:
Many students confuse potential purchasing power like credit card limits with actual money balances. Others assume that any bank deposit, including fixed deposits, automatically falls into M1. To avoid such errors, learners should remember that M1 is about immediate liquidity, while broader measures include less liquid forms like savings and time deposits. Keeping a simple mental list of M1 elements, such as currency and checkable deposits, helps answer similar questions quickly.
Final Answer:
The component of M1 among the options given is checkable deposits.
Discussion & Comments