Functions of money and Measures of money supply M1, M2, M3, M4

Functions of money and Measures of money supply M_1,M₂, M₃, M₄

All we know that money is a medium of exchange. After barter economy it is the most reliable and functional medium of exchange. Money is considered as a medium of exchange because it consist some basic qualities.

Functions of money

In the age of barter economy the medium of exchange was not able to store for long times nor they can divisible as per the requirements; moreover it was difficult to calculate the exact value of the goods. So it was very much essential that the medium of exchange must be the above qualities. That is, the medium of exchange must be stored for long times, it must be divisible in small units and it must be the standard unit by which we can easily calculate the value of the goods. Money as a medium of exchange poses all the qualities. So, in one sentence we can say that,

Money is a matter of function four,

“A medium, a measure, a standard and a store”.

Money is considered as the most liquid asset, because we can use it as a medium of exchange in anytime and anywhere. It is commonly acceptable, its token value is almost zero and it is easy to store also.

Money is considered as a measuring unit of any commodity, though the standard unit of money we can easily calculate the value of the goods; moreover money is divisible into small units. So, it is very much easy to calculate the value of the small units of any goods.

What is the token value of money?

In earlier time the money held the same amount of its value. In those days people had used gold or silver coin, but now a day’s people used token value of money. That means if you melted the coin, you cannot get the same value which the coin hold as a value. More over the paper notes holds almost zero value. In paper notes we found the signature of the Governor of Reserve bank of India (Central bank of India), where it is clearly mentioned that the Governor of central bank promises to pay that amount of sum to the bearer of that note.

As we know that money is a stock concept but over time it is flow concept. So the term supply of money we mean the amount of money in the economy at that particular period of time. In an economy money can be held in various forms ,like money can held in most liquid form in the hands of the public, or it may be the in the bank in form of credit, or demand deposits with the commercial banks, commercial bank time deposits, post office time deposits, credit creation of commercial banks etc.

Must read- 1) Money multiplier theory of money supply

2) Invisible hand

Measures of money supply M_1,M₂, M₃, M₄

In 1977 Reserve bank of India (RBI) published the four measures of money supply, which is like the following

· M₁= Currency held in public hand (C) +demand deposits of the public (DD) + other deposits (OD)

· M₁= C +DD+OD

· M₂= M1 + saving deposits with post office saving banks.

· M₃ = M₁ + time deposits of the public with banks.

· M₄ = M₃ + total post office deposits.

M₃ is known as the broad money

RBI working group redefined the parameter of measurement of money supply latter. M₂ and M₄ now redefined and saving bank deposits of post office and all deposits of post office included in M₂ and M₄ have been dropped. There are now only three monetary aggregates-M₁, M₂, and M_3.

Let us look on new Revised Monetary measures……….

· M₁ = Currency held in public hand (C) +demand deposits of the public (DD) + other deposits (OD)

So, there is no change in the calculation in M1

· M₂ = M₁+Time liabilities portion of savings deposits with banks + certificate of deposits issued by banks + term deposits maturing within one year.

· M₃ = M₂ + term deposits with banks with maturity of over one year + call/ term borrowing of the banking system.

Conclusion- M1, M2 and M3 are the new measurement of money supply, M3 is known as the broad money. Money multiplier is the important concept of money supply.