What is Money?

Money is anything which performs the following four functions:

  1. A measure of value
  2. Medium of Exchange     
  3. A store of value over time  
  4. Standard for deferred payments

A Measure of Value 

Money is used to measure and record the value of goods or services.

Medium of Exchange

Individual goods and services and other physical assets are “priced” in terms of money and are exchanged using money.

A Store of value over time 

Money can be held over a period of time and used to finance future payments.

Standard for Deferred Payments

Money is used as an agreed measure of future receipts and payments in contracts.

Money Supply

Money supply refers to the stock of money in circulation in the economy at a given point of time.

There are four common measures of Money supply, commonly used in India:

Narrow Money – M 1Currency with Public + Demand Deposits with Banking System + Other deposits with the RBI
M 2M1 + Savings deposits of post office savings banks
M 3M1 + Time deposits with the banking system
M 4M3 + All deposits with post office savings banks but not National Savings Certificates

Diagram for Supply of Money

Currency with Public:

According to the RBI, currency with the public is arrived at after deducting cash with banks from total currency in circulation. Currency in circulation refers to the cash or currency within a country that is physically used to conduct transactions between consumers and businesses

Currency in circulation – Cash held by banks.

Demand Deposits with Banks:

All liabilities which are payable on demand. A demand deposit account (DDA) consists of funds held in a bank account from which deposited funds can be withdrawn at any time, such as checking accounts. DDA accounts can pay interest on a deposit into the accounts but aren’t required. A DDA allows funds to be accessed anytime, while a term deposit account restricts access for a predetermined time. 

Time Deposits:

Deposits which are payable otherwise than on demand and they include fixed Deposits, Cash Certificates, Cumulative and recurring Deposits, time Liabilities portion of savings bank deposits, etc.