Basic functions and components of money

Basic functions of money:

• medium of exchange
• unit of value
• store of value

The problem of using money as a way to store value:

• inflation destroy the value of money
• some form of money do not pay interests

Components of money
Monetary base

• The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.
  
  M1 = notes and coins in circulation + demand deposits + other checkable deposits such as NOW accounts + traveler’s checks.
  
  M2 = M1 + money market deposits + money market mutual funds held by individuals +overnight Eurodollar deposits and repurchase agreements + time deposits of less than $100,000.

Note:

• Credit is not a purchasing power but a facilitator of purchasing power, i.e ability to borrow money, and thus not counted as money supply.
• Checks is a claim to the checking account in M1 and thus won’t count as money supply.

Problems in measuring money supply in the US:

• Widespread use of US dollars outside of the US.
• No-load mutual funds as substitutes for time deposits.
• Debit cards and electronic money as substitutes for physical currency.