money supply says that it doesnot include the stock of money with commercial banks, however demand deposits are taken into consideration. but this money is also with commercial banks and hence we shouldnot include it
Question
money supply says that it doesnot include the stock of money with commercial banks, however demand deposits are taken into consideration. but this money is also with commercial banks and hence we shouldnot include it
Solution
The concept of money supply in economics refers to the total amount of monetary assets available in an economy at a specific time. It includes various types of money such as currency, demand deposits, and other liquid assets that can be easily converted into cash.
The confusion here seems to stem from the difference between money "held by" commercial banks and money "owned by" individuals but "held in" commercial banks.
When we say money supply does not include the stock of money with commercial banks, we are referring to the money that is actually owned by the banks themselves. This could be money they have earned or borrowed and are using for their own purposes, such as lending or investing.
On the other hand, demand deposits are included in the money supply because they are owned by individuals or businesses, not the banks. Even though this money is physically held in the banks, it is still considered part of the money supply because the owners can access it on demand and use it to make transactions.
So, in essence, the distinction is not about where the money is physically located, but who has the right to use it. If the money is owned by individuals or businesses and can be used for transactions, it is considered part of the money supply, regardless of whether it is held in a bank.
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