Page 143 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Self Assessment

State whether the following statements are true or false:
1. For anything to be called as ‘money’ it must serve as a medium of exchange.
2. Money makes an economy, a monetary economy.
3. You can keep your earning in the form of money for a specific period of time.
4. Goods cannot serve as store of value.
5. Money facilitates borrowing and lending activities.

8.2 Measures of Money

There is no general agreement as to which assets constitute money. The functions of money,
stated above, apply to a broad range of assets. It is not at all clear where we should draw the line.
Therefore, there is not one but many measures of money supply. Economists have given different
names to different measures.
Two most common measures are called M and M . The M measure is called “transactions
1 2 1
money” (also called narrow money) and M measure is called “broad money”.
2
M (Transactions Money)
1
This measure includes money that can be directly used for transactions to buy things. In the
United States, it consists of:
M (U.S.) = Currency held outside banks
1
+ demand deposits
+ traveller checks
+ other chequable deposits.
In India, M includes:
1
M (India) = Currency held outside banks
1
+ chequable deposits.
M , both in U.S. and India, are broadly the same.
1
M (Broad Money)
2
Cash and chequable deposits, are directly money. But there are also assets, like ‘time deposits’
(in the U.S. these are called saving deposits) which are as good as monies. Times deposits are
mainly ‘fixed deposit’ accounts. Normally, you cannot make payment by cheque from a Fixed
Deposit account. But, in actual practice, you can close the account anytime you like, deposit the
amount into your ‘demand deposit’ (chequable) account, and then use it for making payment.
A fixed deposit account is not directly money but as good as money. It is called “near money”.

Did u know? Assets that are close substitutes of money are near monies.
By adding ‘near monies’ to M we get ‘broad money’ labelled M . In the U.S.,
1 2
M (U.S.) = M
2 1
+ saving accounts (time deposits)
+ money market accounts
+ other near monies.

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