Balance in the money market

Balance in the money market

The money market is such market in which demand for finance and also their offer completely determine the level of rates (as a percentage) of the main national banks.

It is known that balance in the money market turns out when demand for financial "products" is equal to the offer. It happens at a concrete interest bank rate. That is violation of balance in the money market will be impossible if the interest rate of banks changes as well as the income of the population. For example, if income in economy grows, then demand for money will increase, then the interest rate, therefore, will be raised. After that so-called alternative cost for storage of monetary savings increases, and the cost of securities begins to fall. Demand for money (for frauds of speculators) at the same time decreases, firms and the enterprises buy more assets. Thus, macroeconomic balance in the money market is reached and it is logical that at decline in income the situation will turn in the opposite direction.

Whether it is possible to break balance in the money market?

We speak about a concept of short-term balance in the money market and its features. There is such way of the state influence on economy as keysiansky monetary management. It is that balance in the money market is systematically broken. At the same time the level of interest rates artificially changes. It influences investments and also employment, level of income and the output. However trying to influence balance models in the money market, it is possible to get to a trap: to create such situation in economy when interest rates are at the minimum level, and increase in the offer of money cannot change anything. It also is the main problem of balance in the money market: between the commodity and financial markets there is a gap, and inflation amplifies. Only the state can find a way out of this sad situation. Then what is rather dangerous to break macroeconomic balance in the money market.

Long-term balance and monetary rule

Among models there are balances in the money market, except short-term, considered above, there is long-term. Here demand for money does not depend on interest rates. This type of balance was called by "the monetary rule". Its purpose is anti-inflationary regulation. This main condition of balance in the money market at realization of long-term type.

Economists came to a conclusion that short-term monetary management which is directed to regulation of interest rates has to be carried out within the long-term strategy based on the monetary rule.

The stimulating credit policy

Credit policy of the stimulating type is directed to issue of money supply, decrease in norm of obligatory reserves and also gradual reduction of level of an interest rate. The purpose of such actions is to provide economic growth. If the size of an interest rate is low, then economic agents will refuse purchase of securities. It is called "risk of an investment". In this case there is also speculative demand for money. In other words, at any income level the market will remain equilibrium, and the interest rate will not change, having become low. Budgetary tax policy can provide the high rate of economic development. Similar schemes are applicable both for economy of the certain country, and for the global economic process.


Author: «MirrorInfo» Dream Team