Money and its functions

Definitions of Money
The definitions of money vary by country but generally include at least a measure for narrow money and one for broad money. Money is a medium of exchange and, more generally, any medium that can be used for the exchange of goods and services.

Narrow Money vs. Broad Money
Money includes bills and coins used by consumers in everyday transactions and bank deposits if they can be used for transactions. The group is generally referred to as narrow money, as opposed to broad money.
Broad money includes all the items included in narrow money, but also any other liquid assets that can be used to buy goods and services.
The total amount of money circulating in an economy is called money supply, and its size is generally tracked and reported publicly by each country’s central bank or government.
Practical Definitions of Money
The distinction between narrow money and broad money is mainly theoretical. The actual definitions of money used by governments and central banks vary from country to country; although basically, every central bank in the world uses some form of measure for narrow money, broad money, and other intermediate items.
The measures are usually identified by an M followed by one or more digits, and sometimes a letter.
Definitions of Money in the United States
The Federal Reserve in the United States provides two main measures of money – M1 and M2, where M1 is the narrowest and M2 the broadest.
1. M1 consists of currency in circulation, travelers’ checks of nonbank issuers, demand deposits, and other checkable deposits, e.g., negotiable order of withdrawal accounts at depository institutions.
2. M2 includes all the items included in M1, plus savings deposits and money market deposit accounts, time deposit accounts below $100,000, and balances in retail money market mutual funds.
Definitions of Money in Europe
The European Central Bank provides three measures of money – M1, M2, and M3, where M1 is the narrowest and M3 the broadest.
1. M1 consists of currency in circulation plus all overnight deposits.
2. M2 includes all the items in M1, plus deposits redeemable at notice of up to three months and deposits with an agreed maturity of up to two years.
3. M3 includes all the items in M2, plus repurchase agreements, money market fund shares, money market paper, and debt securities issued with a maturity of fewer than two years.