The term M $^3$ comprises M $^1$ together with deposits on deposit account held by_______

Analyze the question: It asks about the definition of the money supply measure M³ (broad money). It is M¹ plus deposits on deposit account held by certain institutions.

Explain the concept: Money supply is measured at different levels of liquidity:

• M¹ = currency in circulation + demand (current account) deposits. This is the narrowest measure.
• M² = M¹ + time/savings deposits with commercial banks.
• M³ = M¹ + deposits on deposit account held by banks and discount houses.

In the classical UK-style definition used in many Nigerian economics texts, M³ extends M¹ by including deposit accounts held with banks and also with discount houses, the money-market institutions that deal in treasury bills and short-term bills of exchange.

Step-by-step solution:

1. Start with M¹ (cash + current account deposits).
2. Add deposit (time/savings) accounts held with banks.
3. Also add deposits held with discount houses, since these are near-money institutions in the money market.
4. Stock exchanges are capital market institutions and do not take deposit accounts in this sense, so D is wrong.
5. "Banks only" (A) or "discount houses only" (B) would leave out one of the two deposit-taking institutions.

Answer: Option C, banks and discount houses.

Exam tip: Remember that the money supply grows broader with each step: M¹ (narrow, cash + current accounts) → M² (+ time deposits) → M³ (+ deposits with banks and discount houses). For the "who holds the deposits" questions, think money market, not capital market. Stock exchanges are never included.