Money and Macroeconomics

Abstract

Money constitutes a medium for purchasing goods and services. It was seen in the circular flow of goods and services in the economy that the functions of money were the valuation of exchange and store of value imputed in the goods and services. Money could be in the form of cash or can exist as promissory notes against future goods and services. The form in which money is held is important for a technical definition of money. For instance, the sum of all cash held, chequeable deposits, travellers cheques etc. that have an instant convertibility into cash, is called the M1 or the narrow defmition of money. The amount of money in the form of M1 plus savings accounts, money market funds, dollar balances abroad, constitute the M2 definition for money. Money existing in M2 form plus large saving deposits and special types of accounts is referred to as M3 money. In general, in macroeconomic analysis we work with the narrow definition of money. The reason for this is that it is nearest to the measure of the total stock of money in circulation across well-known macroeconomic activities, such as, consumption, investment and government expenditure. The narrow definition of money comprises money as currency and demand deposits.