Question

What economic functions does money perform?

How is money supply measured and why? 

Answer 1

Economic functions of money:

1. Medium of exchange : Money provides a medium of exchange in trading without which we would have to rely on the barter system which is not a very efficient way to do trade.

2.Store of value : Since money has replaced barter system in a transaction, it means it has some value that is why people are ready to take it. You can keep this money and buy with it anything at a later point of time.Thus, it acts as a store of value.

3. Unit of account: Money also provides a way to to keep account of the value of the goods and services being exchanged as a common measurement unit.

4.Standard of deferred payment : People who do not have money can borrow from other people to buy any stuff they want and can pay back later. This standard unit of making deferred payment or borrowing is also a function of money.

Money supply is measured as :

Money comes in different forms or types (liquid or easily liquidated form) - 1. Notes and Coins, 2. Deposits(individual deposits or bank deposits with central bank or corporation deposits with the bank i.e current account or savings account) 3. Near Money (certificates which can be easily liquidated e.g, bonds)

Apart from the above, there are various other non-cash type of money

The various measurement money supply are generally classified as M0, M1, M2 and M3 depending on the types of money included.

M0 is the most narrow measurement of money supply where M3 is the most broad measurement of money supply and includes all types of money

M0 = notes and coins + deposits ........................basically cash held by public and corporation + deposits (CASA)

M1 = M0 + Deposits wits post offices

M2 = M0 + Net time deposits (Fixed deposits)

M3 = M2 + Deposits wits post offices

This is done in this way so as to understand the narrow form (liquid) and broad form(liquid +non-liquid) of money supply in the whole economy.