International financial market INDIVIDUAL2 - Essay Example

As a point of departure, it is imperative to note that, the USA central bank tries to attain economic stability by changing the amount of money in flow, rates and availability of credit. In addition, the bank varies the composition of the country’s national debts (Mehnert-Meland, 2005). To achieve the monetary functions, the bank uses three primary instruments, which include: Open market Operations The discount Window Reserve requirements Open market Operations The aspect of open market operations refers to the trading of government bonds by the American central bank (Mehnert-Meland, 2005).

The bank buys and sells the bonds. For instance, when the bank buys the bonds, money supply is expanded, and this leads to low interests and if the bonds are sold the money supply is contracted, consequently, increase in interest rates. Reserve requirements This refers to the percentage of commercial banks’ chequering accounts (demand deposit liabilities), which should be maintained on making deposits at the Central Bank as a condition of Banking regulation. This percentage is rarely used, however, when applied it affects the money supply and level of credit conditions (Honeygold, 2009).

For instance, when the reserve requirement is raised, it decreases the supply of money by necessitating a larger percentage of the banks, demand deposits to be held by Central Bank. This takes the banks and other financial institutions out of the money supply. This action is done occasionally because it is attributed to long-term alteration of the money supply. The Discount Window This is situation where the commercial banks and other financial institutions are able to have a loan of reserves from Central Bank at a certain discount rate.

The rate is usually set relatively below the short-term market rates called T-bill (Honeygold, 2009). This condition enables the commercial banks to know the amount of money to give as loans. In essence, credit conditions are varied, consequently affecting the supply of money. This study establishes that of the three instruments, it is the Discount of Window, which the Central Bank does not have full control over. For this reason, the newly formed Rockoslovenia central bank needs to embrace these instruments because the monetary policy is fundamental in a nation’s variance in inflation, interest rates, unemployment levels and the overall economic growth (Honeygold, 2009).

The Central Bank has the responsibility of creating a stable financial milieu by allowing savings and investments to occur. This expands the economy of a nation as a whole. For the purposes of efficient incorporation of the American Central Bank model into the newly formed Rockoslovenia central bank, it is essential to consider the major components of the Federal Reserve System their functions (Honeygold, 2009). The American central banking system was formed in 1913. It comprises of three primary components, which include the Board of Governors, 12 regional Federal Reserve Banks and the member banks.

Board of Governors This body was formed as a federal government agency. The federal administration and Congress have significant influence over the appointments of the seven-member board. The president with the counsel and approval of the senate appoints the seven governors. The primary role of the Board of Governors is to oversee the whole system and wholly responsible for the monetary policy. The board influences the monetary and credit conditions in the