MONETARY MARKET AND MONETARY CREDIT POLICY, Money market and the mechanism of its functioning, the essence of money and their functions - Macroeconomics


Developed competencies:


• the specific features of the money market and the mechanisms of its functioning;

• essence, goals, instruments, types and results of the state's monetary policy;

• The essence of the macroeconomic equilibrium of commodity and money markets in the IS-LM


be able to

• identify acute problems in the monetary sphere of the domestic economy;

• draw conclusions about the implementation of monetary policy;


• Modern methods of analyzing possible ways of solving credit and money problems by conducting macroeconomic policy of the state.

Money market and the mechanism of its functioning

The essence of money and their functions

The transition of the Russian economy to an innovative development path is a condition for observing national interests and achieving economic security. An effective search is needed for ways to significantly increase the financing by banks of investments in socio-economic and scientific and technical development without a sharp increase in inflation. The transition to a stimulating policy presupposes the solution of a number of theoretical and practical problems. This is primarily about the choice of the objectives and instruments of monetary policy in modern conditions, which involves, in turn, the study of internal mechanisms for the functioning of the money market.

Money market is a combination of relationships between the banking system that creates money and economic entities (other than banks) that demand them.

Money is a universal equivalent, with specific functions that distinguish them from other financial assets.

Money functions:

- a measure of value;

- means of circulation;

- means of payment;

- a means of accumulation;

- world money.

Money as a measure of value is used to measure and compare the values ​​of goods and services. Money as a measure of value is homogeneous and therefore used as a means of counting.

Money fulfills the function of means of circulation. This refers to the possibility of using money to carry out transactions. When buying basic necessities, in the case of taxes, shares are not paid. Money serves as a legal tender. This means that any obligations can be paid by money under the law and no one has the right to refuse to receive money in payment of obligations.

As a means of circulation in the conclusion of transactions, the purchase of goods, in credit relations, money serves as the universal means of payment. Barter exchange is an alternative to the use of money as a means of circulation. Thanks to the performance of the money of this function, it is possible to divide the exchange of goods into two acts: purchase and sale.

In the case of a lender-debtor relationship, money performs the payment method.

To make payments, economic entities resort to transferring banknotes, notes to accounts in banks, documenting the debts of one economic agent to another. Therefore, there are the following groups of means of payment:

• cash and checks;

• current accounts;

• Debt obligations.

If the first two groups create a banking system, then the third one is other economic entities.

The first two groups are vital for any economy. The third is most in demand in crisis situations, when the problem of mass non-payments arises and for many firms the opportunity to pay with bills becomes a means of continuing operations.

Using money as a medium of circulation makes transactions much easier. In a stable market economy, the national currency is used as the medium of circulation and the measure of value. In a crisis situation, a more stable foreign currency is used as a measure of value, the national currency is used as a legal means of circulation.

In addition to the measures of value , medium and means of payment , money performs the function of an accumulation facility ( value preservation ). To preserve the value, various assets are used. These are stocks, real estate, precious metals, works of art, etc. In comparison with these assets, money under certain conditions can better perform the function of an accumulation facility, having a higher liquidity, representing the ability to exchange quickly and at minimal cost to any assets. An asset that can be used as a means of payment and has a fixed nominal value is considered as an absolutely liquid asset. This is money. All other assets have limited liquidity. So, real estate (house, shop, land plot) is low liquid. The prices for it are changeable. The search for the buyer takes a long time, and the costs of the transaction, in particular the legal documents, can be great.

The function of the means of accumulation money is fully implemented if they retain their purchasing power. However, the value of money can change. When there is competition in the money market for two kinds of money of unequal value, the money that has a higher value, to a greater extent, serves as a means of accumulation. An example is the position of the US dollar in relation to the Russian ruble in the domestic economy.

In countries with developed market economies, the most important function of money as a means of circulation. The function of the means of accumulation is not so significant. Economic agents in these countries have other income-producing assets that can less effectively perform this function.

In countries with a weak level of market relations, the ability of money to preserve value is more important than their ability to serve as a medium of circulation. In conditions of instability of the national economy, the function of the measure of value and the means of accumulation is more often performed by a stable foreign currency, while the depreciating domestic currency serves as a means of circulation.

Economic entities that do not have the goal to immediately spend the earned national currency, exchange it for a stable foreign, which they accumulate. When there is a need to make purchases after a while, they exchange foreign currency for a national currency, if it is legally recognized as a means of circulation.

High liquidity of money is their advantage as a means of accumulation compared to other assets, especially in a stable economy.

However, compared to some less liquid assets, money has the disadvantage that their owner has to sacrifice income that could be obtained by investing money, for example, in shares. Dividends paid to the owner of shares may be substantially higher than interest payments on bank deposits.

The function world initially performed ingots of precious metals. Currently, the function of world money is actually performed by the US dollar.

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.