Functions of Money:

1. Medium of Exchange: Money serves as a widely accepted intermediary in transactions, eliminating the need for barter. It simplifies trade by providing a common means of exchange.
2. Measure of Value (Unit of Account): Money allows individuals and businesses to assign values to goods and services in a standardized manner. It provides a basis for comparing and pricing items.
3. Store of Value: Money retains its value over time, enabling individuals to save and preserve their wealth. It should maintain its purchasing power and not significantly erode in value over time.
4. Method of Deferred Payment: Money enables people to enter into agreements and contracts involving future payments. It allows for credit and lending, as individuals can promise to pay with money at a later date.

Characteristics of Money:

1. Durability: Money must be able to withstand wear and tear to ensure its continued use. Physical forms of money, such as coins and banknotes, need to last over multiple transactions.
2. Divisibility: Money should be divisible into smaller units to facilitate transactions of varying values. For example, a single currency unit can be divided into cents or pence, making it practical for both small and large transactions.
3. Portability: Money should be easy to carry and transport, ensuring that individuals can use it for transactions in various locations. Lightweight and compact forms of money are preferred.
4. Uniformity: Money must have consistent value and appearance. It should be easily recognizable and standardized, so people can trust its authenticity and worth.
5. Limited Supply: To maintain its value, money should not be excessively abundant. A controlled and limited supply helps prevent inflation and ensures that money retains its worth.
6. Acceptability: Money should be widely accepted and trusted within an economy. People should have confidence that it will be accepted for transactions, making it a universally recognized medium of exchange.

The concept of the money supply is central to understanding how an economy's financial system operates. Let's delve deeper into the different components of the money supply:

1. Narrow Money (M1): This is also known as the "monetary base" or "narrow money supply." It includes the most liquid forms of money:

• Physical Currency (Notes and Coins): These are the tangible forms of money, such as paper banknotes and metal coins, that are in circulation.
• Deposits in the Central Bank: This refers to the funds that banks and financial institutions hold in accounts with the central bank. These deposits often represent the reserve requirements that banks must maintain.

2. Broad Money (M2): This is a broader measure of the money supply, which includes not only the most liquid forms of money but also some less liquid assets. It's divided into several categories:

• M2 includes M1: So, it includes all of the components of narrow money mentioned earlier.
• Savings Accounts: These are deposits held in savings accounts, including regular savings accounts and time deposits (like certificates of deposit or CDs). These accounts are somewhat less liquid than physical currency and checking accounts.