Money Market - Meanings, Functions, Demand | Detailed Information |

INTRODUCTION

Money is at the centre of every economic transaction and plays a significant role in all economies. In simple terms money refers to the assets which are commonly used and accepted as a means of payment or as a medium of exchange or of transferring purchasing power. For policy purposes, money may be defined as the set of liquid financial assets, the variation in the stock of which will have impact on aggregate economic activity.

Money has generalized purchasing power and is generally acceptable in settlement of all transactions and in discharge of other kinds of business obligations including future payments. 

For example, a bill of exchange may also be a medium of exchange, but it is not money since it is not generally accepted as a means of payment. 

Money is a totally liquid asset as it can be used directly, instantly, conveniently and without any costs or restrictions to make payments. At the fundamental level, money provides us with a convenient means to access goods and services. Money represents a certain value, but currency which represents money does not necessarily have intrinsic value. As you know, fiat money has no intrinsic value, but is used as a medium of exchange because the government has, by law, made them "legal tender," which means that they serve by laws as means of payment. In modern days, money is not necessarily a physical term; it may also constitute electronic records. Money is, in fact, only one among many kinds of financial assets which households, firms, government and other economic units hold in their asset portfolios. Unlike other financial assets, money is an essential element in conducting most of the economic transactions in an economy.

FUNCTIONS OF MONEY

Money performs many important functions in an economy.

1. Money is a convenient medium of exchange or it is an instrument that facilitates easy exchange of goods and services. Money, though not having any inherent power to directly satisfy human wants, by acting as a medium of exchange, it commands purchasing power and its possession enables us to purchase goods and services to satisfy our wants. By acting as an intermediary, money increases the ease of trade and reduces the inefficiency and transaction costs involved in a barter exchange. By decomposing the single barter transactions into two seperate transactions of sale and purchase, money eliminates the need for double coincidence of wants. Money also facilitates separation transactions both in time and place and this in turn enables us to economize on time and efforts involved in transactions. 
2. Money is an explicitly defined unit of value or unit of account. Put differently, money is a 'common measure of value' or 'common denominator of value' or money functions as a numeraire. We know, rupee is the unit of account in India in which the entire money is denominated. The monetary unit is the unit of measurement in terms of which the value of all goods ans services is measured and expressed. The value of each good or service is expressed as price, which is nothing but the number of monetary units for which the good or service can be exchanged. It is convenient to trade all commodities in exchange for single commodity. So also, it is convenient to measure the prices of all commodities in terms of a single unit, rather than record the relative price of every good in terms of every other good. An obvious advantage of having a single unit of account is that it greatly reduces the number of exchange ratios between goods and services. Use of money as a unit of account can encourage trade by making it easier for individuals to know how much one good is worth in terms of another. 
3. Money serves as a unit or standard of deferred payment i.e. money facilitates recording of deferred promises to pay. Money is the unit in terms of which future payments are contracted or stated. However, variations in the purchasing power of money due to inflation or deflation, reduce the efficacy of money in this function. The effectiveness of an asset as a store of value depends on the degree and certainty with which the asset maintains its value over time. There are some common features that money should possess in order to make it serve its functions as money to circulate. Money should be:

• generally acceptable
• durable or long-lasting
• effortlessly recognizable
• difficult to counterfeit i.e. not easily reproducible by people
• relatively scarce, but has elasticity of supply 
• portable or easily transported
• possessing uniformity; and
• divisible into smaller parts in usable quantities or fractions without losing value

THE DEMAND FOR MONEY 

If people desire to hold the money, we say there is a demand for money. As we are aware the demand for money is in the nature of derived demand; it is demanded for its purchasing power. Basically, people demand money because they wish to have command over real goods and services with the use of money. Demand foe money is actually demand for liquidity and demand to store value. The demand for money is a decision about how much of one[s given stock of wealth should be held in the form of money rather than as other assets such as bonds. Although it gives little or no return, individuals, households as well as firms hold money because it is liquid and offers the most convenient way to accomplish their day to day transactions.

The quantity of nominal money or how much money people would like to hold in liquid form depends on many factors, such as income, general level of prices, rate of interest, real GDP, and the degree of financial innovation etc. higher the income of individuals, higher the expenditure and richer people hold more money to finance their expenditure. The quantity is directly proportional to the prevailing price level; higher the prices higher should be the holding of money. One may hold his wealth in any form other than money, say as an interest yielding assets. It follows that the opportunity cost of holding money is the interest rate a person could earn on other assets, Therefore, higher the interest rate, higher would be opportunity cost of holding cash and lower the demand for money. Innovations such as internet banking, application based transfers and Automated Teller Machines(ATM) reduce the need for holding liquid money. Just as households do, firms also hold money essentially for the same basic reasons.