a. Money is a medium of exchange that can be used to purchase goods and services and to repay debts.
b. For any currency to be categorized as money, it should be able to perform the following functions:
i. It should be a medium of exchange.
ii. It should be a store of value.
iii. It should be a unit of account.
c. The money must also possess some of the qualities, such as:
i. It must be readily acceptable.
ii. It must have a known value.
iii. It must be easily divisible.
iv. It must have a high value: weight
v. It must be extremely difficult to counterfeit.
d. Thus, for what constitutes money, there are two definitions, i.e. a narrow definition and a broad definition.
e. According to the narrow definition of money (which is denoted as M1), it consists of:
i. all the notes and coins in the circulation,
ii. demand deposits,
iii. checking account balances,
iv. traveler’s checks of nonbank
f. According to the broad definition of money (which is denoted as M2), it consists of:
i. all, what is constituted, under the narrow definition, along with
ii. savings accounts and money market accounts,
iii. time deposits of less than 100 thousand, and
iv. retail money-market mutual fund accounts.