Money is simply is a medium of exchange which could also be used for the measure of the value of anything; be it food, commodities, wage rates or anything else like these. There are various types of money depending upon the liquidity. Money has developed through various stages, starting from commodity money to it’s latest form as virtual currency.
In India, money is generated by the Reserve Bank of India which is called Reserve money or High Powered money, denoted by M0. There are various types named as narrow money, broad money etc which are explained below.
MO (Reserve money)
The reserve money or high powered money is generated by RBI, which is denoted by M0. It is the summation of currency in circulation (with banks + with the public) and bankers deposit with the RBI.
M1 (Narrow Money)
Narrow money tells us about total currency with the public and demand deposits with the banks. In demand deposit of banks, both savings and current account deposits are included.
If we add up savings deposit of the post offices to the narrow money, will get M2.
M3 (Broad Money)
As the name suggests, it will be something larger than narrow money. Yes, it is. If we add up the time deposits with the banks to the narrow money, what we get is the broad money. It gives us an idea of the total deposits with the banking system.
If we add up post office time deposits into the broad money, what we get is monetary measure M4.
Which has the highest liquidity?
Liquidity is something which tells us about how easily something can be converted into the cash. Like currency notes are perfectly liquid. Our demand deposits with banks have more liquidity as compared to time deposits with the banks because they are difficult to encash. On the similar lines, the liquidity of monetary measures M0, M1, M2, M3 and M4 are as:
M0 > M1 > M2 > M3 > M4
Here Mo has the highest liquidity and M4 has the lowest liquidity.
Click here to read about the Different type of Bank Accounts.