What are the different measures of the money supply, and what is the need to have different definitions?

The term money supply is used two related or similar variables
describing the sate of economic condition of an economy or a country. These two different
variables are often represented as M1 and M2.

M1 is a narrowly
defined variables as compared to M2. It refers to the total supply of total coins, paper
currency, and deposits in all demand or checking accounts in banks. Coins and note in bank vaults
and therefore not in circulation are not included in M1. This represents the money that is used
for facilitating the commercial transactions in the economy.

M2 is a
more broadly defined variable. It includes all the items included in M1, plus some additional
items. These are some liquid assets which are not as liquid as the assets in M1, but still play a
part in facilitating economic transactions as these can be converted in the form of M1 assets
quickly and at marginal cost. These include saving accounts, small time deposits and retail money
market mutual funds. Also these are safe form of assets.

We use two
different measures for money supply because the narrow money (M1) can be used for all type of
transactions. Whereas the additional components of broad money (M2) can be used only for some
kinds of transactions. For example we cannot use then for paying for the grocery we buy in a
store.

Some economies also define other measures of money supply.
For example M0 includes only coins and notes, and MB includes M0 plus Federal Reserve Bank
Credit.