What is the Dynamic Role of Money?

On account of its static or technical functions, money tends to play a dynamic role in determining economic trends. It plays a very active and highly important part in the economic system by influencing the general level of process.

Its volume and velocity whether the motivation comes from the state itself or from the general public, can lead to a rise or fall in the general price level.

Since rising prices generally stimulate production, and falling prices check it, a general rise or fall in the price level is liable to affect, for better or for worse, the welfare of most sections of the community.

Monetary conditions are inclined to stimulate or discourage consumption as well as production. Money, thus, is a potent factor that is liable to stimulate or hinder economic progress.

The changes in the flow of money have a definite influence in determining the course of a free-change economy. The laws of nature do not provide the means of ensuring that there should be just enough money, neither too much nor too little, under an “automatic” operation of the system.

Money, therefore, plays an important and active part in influencing economic trends through either an inadequate or excess of its supply compared with the amount required for maintaining the stability of its value and the volume of economic activities.

Money directs idle resources into productive channels, and thereby affects output, income, employment, consumption and consequently, the economic welfare of the community at large.

Money makes it possible to have financial economic planning as a workable proposition of physical planning at the micro-level and macro-level.

Being an essential part of the modern exchange mechanism and the market economy, money is surely productive, in the sense that it is an aid to specialisation and production in a capitalist economic system.