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In the terminology of money supply employed by the Reserve Bank of India till April 1977, this M3 was called Aggregate Monetary Resources (AMR).The measure M4 of money supply includes not only all the items of M3 described above but also the total deposits with the post office savings organisation. We explain the sterilization operations by RBI later.It follows from above that the two objectives of external balance and internal balance clash with each other.

Again its intervention was only limited.

But there is limit to this sterilization operation as it has not unlimited amount of government securities to sell them to the banks. That is, one rupee of high- powered money kept as bank reserves gives rise to much more amount of demand deposits. They are money as they are generally acceptable as medium of payment.Bank deposits are created when people deposit currency with them. But it cannot buy inflows of foreign exchange indiscriminately as it leads to higher inflation.RBI has also resorted to sterilization of increase in money supply by selling government securities to the banks and thereby getting back the money issued by it. Notably, the Chicago School led by Milton Friedman opts to include all bank deposits, time and demand, in money supply. The working group on monetary reforms under the chairmanship of late Prof. Sukhamoy Chakravarty recommended its use for monetary planning of the economy and setting target of the growth of money supply in terms of M3.Therefore, recently RBI in its analysis of growth of money supply and its effects on the economy has shifted to the use of M3 measure of money supply. Typically, a central bank can also influence banking activities by manipulating interest rates and setting reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers). It will be seen that the total stock of money supply (that is, the top) is determined by a multiple of the high-powered money (H). Supply of paper money in the country is governed by the system laid down for the purpose.The first one is in vogue in UK and the second one is prevalent in USA and the third one in India at present. But the policy of monetization of budget deficit by the Central Bank involves a risk. In fact, Schwartz and Friedman are willing to consider as money all marketable government securities which are supported at par. It also does not include various forms of credit, such as loans, mortgages, and credit cards. The value of rupee which was around Rs. There are two possible links between budget deficit and growth in money supply. ThusIt is generally thought that time deposits serve as store of value and represent savings of the people and are not liquid as they cannot be withdrawn through drawing cheque on them. But it has to be kept strictly within safe limits.Thus, increase in money supply affects vitally the rate of economic growth. It is rather difficult for any one variant of the gold standard to claim undisputed supremacy regarding the regulation of money supply and its control. First, the money supply refers to the total sum of money available to the public in the economy at a point of time. Thus, the ‘quantity of money’ means the ‘total amount of money in circulation’ in existence at a time.Money is something which is measurable. This implies that our exports will be greater than imports.Now, if in a year there is deficit in current account, that is, NX is negative, it means our demand for foreign exchange, say, the US dollars, for imports of goods and services will exceed the supply of foreign exchange.

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