Money is defined in two ways: narrowly and broadly.
The narrow definition for money includes coins, currency, demand deposits and other checkable deposits. The total of coins, currency, bank deposits and other checkable deposits is what we call money supply in the narrow sense. This is also called M1.
Coins:
• Are a small proportion of the total quantity of money in an economy. They come in small denominations.
• They are made of metal and normally the value of metal in them is less than the face value of the coin.
Currency
• This is paper money e.g. 50/= and 100/= bills.
• Currency constitutes the second and far larger share of the total money supply than coins.
• The central bank of Kenya issues all the currency just as it does the coins.
• Initially, there used to be gold of equivalent value to the amount of currency issued to back it and give it value. Currently, however, all the money is not backed by gold. Its value is derived from its acceptability by people.
Bank Deposits
These are bank deposits subject to payment on demand. They are much larger than coins and currency. They are also called checking accounts. These deposits are considered to be money because they can be as easily used in transactions as cash, by simply issuing a check. They are as much as money in storing value, as a medium of exchange and as a standard of value.
Other checkable deposits
These include negotiable order of withdrawal (NOW) accounts and other accounts that are very close to being demand deposits. NOW accounts are interest-bearing checking accounts at banks, savings societies and other financial institutions.
Money supply is broadly defined as narrow money plus savings and small time deposits, money market mutual fund balances and money market deposit accounts. This money supply broadly defined is also called M2.
The reason why time and savings deposits were excluded from the narrow definition of money is that they are not readily withdrawable and so can’t perform effectively the role of being medium of exchange. However, since they perform the other functions of money and can actually be withdrawn and used for transaction (though not readily), they have been included in M2.
Kavungya answered the question on August 10, 2021 at 08:34
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