Money is a financial asset that serves three functions in the real economy.
Serves as a medium of exchange,
Serves as an unit of account,
Serves as a store of value.
Money has two components – narrow money and broad money.
Narrow money is money held for immediate current spending or “transaction purposes”.
Broad money is money held for transaction purposes and money held in the form of savings or store of value.
M1 denotes narrow money and M2, M3 and M4 denote broad money.
Supply of money includes:
Currency components, and
Narrow definition of money supply says that since it is primarily a “medium of exchange”, whatever assets perform this function they are to be included in the money supply. In the broader concept money supply is based on liquidity approach. It stresses the ‘store of value’ function of money. The different aspects of money supply are:
Demand deposits of commercial banks
Saving deposits of commercial banks
Post deposits of commercial banks
Post office time deposits