Money in Modern Economy

The meaning of money

Money is the set of assets in the economy that

the people regularly use to buy goods and
services from each other.
The cash in one's wallet is money because one
can buy a meal at a restaurant or a shirt at a
clothing store.

The Functions of Money

A medium of exchange:- A medium of exchange is an

item that buyers give to sellers when they want to
purchase goods and services.
Unit of account :- It is the yardstick people use to
post prices and record debts.
Store of Value:- It is an item that people can use to
transfer purchasing power from the present to future .
Liquidity:-It is ease with which an asset can be
converted into the economy's medium of exchange.

The kinds of money

When the money takes the form of a commodity

with intrinsic value, it is called commodity
money.The term intrinsic value means that the
item would have valus even it were not used as
money.One example of commodity money is gold
and another is cigarettes in POW camp.
Money without the intrinsic value is called fiat
money.A fiat is an order or decree and fiat money
is established as money by government decree.

Money Supply

The term 'the supply of money' is synonymous

to such terms as money stock , stock of
money , money supply and quantitiy of money.
The supply of money at any moment is the total
amount of money in the economy.
There are various views regarding the defintion
of money and accordingly there are different
defintions of money supply .

M0 and M1

1. M0 - Reserve Money

M0 = Currency in Circulation + Bankers' Deposits with RBI + Other deposits with RBI

2. M1 - Narrow Money

M1 = Currency with public + Demand deposits with the Banking system + Other
deposits with RBI
M1 = Currency with the Public + Current Deposits with the Banking System +
Demand Liabilities Portion of Savings Deposits with the Banking System + 'Other'
Deposits with the RBI

M2 and M3

3.M2
M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of
Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and
including one year with the Banking System (excluding CDs)
M2 = Currency with the Public + Current Deposits with the Banking System + Savings Deposits with
the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a
contractual maturity up to and including one year with the Banking System (excluding CDs) + 'Other'
Deposits with the RBI
4. M3 - Broad Money
M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking
System + Call/Term borrowings from 'Non-depository' Financial Corporations by the Banking System

M4

5. M4
M4 = M3 + All deposits with post office savings
banks

Determinants of money supply

The required reserve ratio

The level of bank reserves

Public desire to hold currency and deposit.