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Money – Different Types

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Money – Different Types

shape Introduction

Money is a medium of exchange for goods or services within an economy. The main functions of money are classified as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

Ideal money has three critical characteristics which are as follows :

    a) It acts as a medium of exchange
    b) It is an economic good
    c) It is a means of economic calculation.


shape Money

Money – Different Types:

  • Standard Money

  • Token Money

  • Commodity Money

  • Fiat Money


Standard Money:

  • It is that form of money in terms of which all other forms of money in the country are measured.

  • It is unlimited legal tender and is subject to free coinage, i.e., anybody can bring it’s metal and get coins made of it.

  • In this type, it’s real or intrinsic value is equal to its face value.


Token Money:

  • It is that money which is made up of cheaper metal.

  • It is limited legal tender.

  • It is not subject to free coin age and its face value is greater than its intrinsic or metallic value.


Commodity Money:

  • It is the simplest kind of money which was used in barter system where the valuable resources fulfill the functions of money.

  • Examples: Gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, silk, candy, nails, cocoa beans, cowries and barley.

  • The value of this kind of money comes from the value of resource used for the purpose.


Fiat Money:

  • Fiat currency is the kind of money which do not have any intrinsic value and it can’t convert into a valuable resource.

  • The value of this money is determined by government order which makes it a legal instrument for all transaction purposes.

  • Examples: Paper money, Coins.


Money – Money Supply:

  • The total stock of money which is circulating in the economy is called the money supply.

  • It involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.

  • RBI’s has referred four measures of money supply which are: M1, M2, M3, and M4.

  • These measures indicate the monetary liability of the ‘Money Creating’ sectors, viz., the Reserve Bank of India (RBI), Commercial and Co-operative banks, to the ‘money using sectors within the country referred to as the Public


Reserve Money (M0):

  • Reserve money (M0), also called base money or high-powered money, is the highly liquid component of money stock in the economy and plays a crucial role in the determination of other monetary aggregates.

  • It represents the total monetary liabilities of the RBI.

  • Monetary policy actions and market operations of the RBI that cause changes in the size of its balance sheet could result in changes in the reserve money


Money Supply Measures Details
M1 (Narrow Money) Currency with the public + demand deposits with banking system + Other deposits with the RBI
M2 M1 + Post Office Savings Deposits
M3 (Broad Money) M1 + time deposits with the banking system
M4 M3 + total post office deposits


Narrow Money (M1):

  • Narrow money is a category of money supply that includes all physical money such as coins and currency, demand deposits and other liquid assets held by the central bank.

  • In the United States, narrow money is classified as M1 (M0 + demand accounts).

  • In the United Kingdom, M0 is referenced as narrow money.


M2:

M2 is a broader money classification than M1, because it includes assets that are highly liquid but are not cash.

Broad Money (M3):

M3 is a measure of the money supply.

M3 = M2 plus large and long-term deposits

M4:

M4 = M3 + total post office deposits