In economics, money is a tool used as a medium of exchange and a store of value. The existence and functioning of money is one of the cornerstones of the modern economic system, as they facilitate the exchange of goods and services, contributing to the distribution of resources and the accumulation of wealth. In the definition of money, economists have put forward the concepts of broad money and narrow money, which have their own characteristics and functions.
First, let's understand the concept of broad money. Broad money is a broader concept of money that encompasses a variety of currencies and monetary equivalents, including not only cash (banknotes and coins), but also transferable savings deposits, checking deposits, term deposits, and other highly liquid financial assets. The definition of broad money includes different amounts of money, such as M1, M2, M3, etc., which reflect different levels of monetary liquidity. Broad money is often used to measure the total amount of money in the entire economic system in order to monitor inflation, monetary policy, and economic activity.
In contrast, narrow money is a narrower concept of money that usually includes only cash and transferable deposits that can be used for instant payments, i.e. the amount of M1 money. Narrow money is mainly used for everyday transactions, such as the purchase of goods and payment for services. This form of money has a very high level of liquidity in the economy because they can be easily used for exchange and payments without going through complex financial transactions.
Now that we understand the basic concepts of broad and narrow money, let's dive into the differences between them.
First of all, one of the most significant differences is liquidity. Broad money includes a variety of financial assets and therefore has a high level of liquidity. This means that a person or institution holding broad money can exchange it for cash or use it for other investments at any time. On the contrary, narrow money is mainly used for everyday transactions and has very high liquidity, but is not as diverse as broad money.
Here's an example to illustrate the difference: Suppose a person has a $10,000 savings deposit and $100 in cash. According to the definition of broad money, the total amount of the person's currency** is $10,100. However, according to the definition of narrow money, the total amount of his currency** is only $100, because only this part is cash that can be used immediately for payment. If he wants to pay for an expense with his savings deposit, it takes some time and formalities to convert it into cash, which reflects the liquidity difference between broad and narrow money.
Second, broad and narrow currencies also have different effects on monetary policy. Banks are generally more concerned about narrow currencies because they directly affect inflation and the execution of monetary policy. By adjusting the amount of narrow money, banks can control inflation levels and implement monetary tightening or easing policies to adjust economic activity. Broad money, while also important, is often used more for macroeconomic analysis and monitoring than for direct influence on monetary policy.
Here's another example: Suppose a country's ** bank decides to implement a tight monetary policy in order to curb inflation. To achieve this, they can reduce narrow money**, take back some cash or raise interest rates, making people less willing to hold cash. This will have a direct impact on the currency** and liquidity in the market, which in turn will affect the overall performance of the economy.
Finally, broad and narrow money also behave differently in economic cycles. Broad money usually grows faster during economic expansion because people are more inclined to save and invest, which increases the demand for various financial assets. Conversely, broad money** is likely to decrease during a recession, as people are more inclined to hold cash to cope with uncertainty. Narrow money is more sensitive and usually contracts when inflationary pressures rise to maintain monetary policy stability.
To sum up, there is a clear difference between broad money and narrow money in economics. Broad money includes a variety of financial assets with high liquidity and is used for macroeconomic analysis and monitoring. Narrow money, on the other hand, includes only cash and transferable deposits that can be used for instant payments, which has higher liquidity and directly affects inflation and the implementation of monetary policy. In real life, we can see how these differences affect the use of money and the functioning of the economy. Therefore, it is crucial for economists and policymakers to understand the difference between broad and narrow money in order to better manage money** and maintain economic stability.