Read the passage carefully and answer the questions based on the passage:

Money and Banking

Exchange of commodities without the mediation of money is called barter exchange. It requires double coincidence of wants. Money facilitates exchanges by acting as a commonly acceptable medium of exchange. In a modern economy, people hold money broadly for two motives - transaction motive and speculative motive. Supply of money, on the other hand, consists of currency notes and coins, demand and time deposits held by commercial banks, etc. It is classified as narrow and broad money according to the decreasing order of liquidity. In India, the supply of money is regulated by the Reserve Bank of India (RBI) which acts as the monetary authority of the country. The commercial banks of the country and RBI are responsible for changes in the supply of money in the economy. RBI regulates money supply by controlling the stock of high powered money, the bank rate and reserve requirements of the commercial banks.

The classification of money in terms of narrow and broad money is due to .....

Liquidity

The correct answer is Option (2) → Liquidity

The passage states: "Supply of money, on the other hand, consists of currency notes and coins, demand and time deposits held by commercial banks, etc. It is classified as narrow and broad money according to the decreasing order of liquidity."

M1 and M2 are known as narrow money. M3 and M4 are known as broad money. These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.