A musical instrument is an instrument to create musical sounds. Or, an instrument which is musical.
But... music instrument is an instrument to create music. Or, an instrument which is used in composing and/or performing music.
Which one is correct?
Perhaps both. But musical instrument is more common in literature.
"Instrument" is a noun.
"Musical" is the adjective, to describe the noun. Adjective-noun phrase. Like "angry monkey", it's a monkey which is angry.
While "music" is also a noun, noun-noun. Like "anger monkey", it's a monkey appears in anger. That's uncommon, but eeeyyyyy. Other relevant noun-noun examples are:
- "Water lily", a lily flower which lives in an aquatic (watery) environment.
- "Water hose", a hose (flexible plastic/rubber tube) for conveying water.
- "Firefighter", a person whose job is to extinguish the fires.
Or, "street fighter", A person whose job is to extinguish the streets. Oh look, no more street.