Money Market: Definition And Key Functions - SS2 Accounting Lesson Note
The money market is a part of the financial system where short-term borrowing and lending takes place. It is where banks, corporations, and governments can access funds for short periods of time, typically up to one year. The key functions of the money market are as follows:
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Provides liquidity: The money market provides an avenue for investors to buy and sell short-term financial instruments, such as treasury bills and commercial paper, which are highly liquid and can be easily converted to cash.
Facilitates short-term borrowing and lending: The money market allows businesses and governments to borrow funds for short periods of time, typically up to one year. This borrowing is usually done through the issuance of commercial paper or other short-term debt instruments.
Manages short-term cash flow needs: The money market allows businesses and governments to manage their short-term cash flow needs by providing access to funds that can be used to pay for expenses or meet other short-term obligations.
Helps set interest rates: The money market is a key factor in determining short-term interest rates, which can have an impact on the overall economy. Central banks, such as the Federal Reserve, can use the money market to implement monetary policy and influence interest rates.