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The relationship between price and Money Supply - Research Paper Example

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Central banks and monetary policy Table of Contents Objectives of Central Banks 3 Balance Sheet Analysis 4 The monetary base 5 The money supply 5 Role of banks in the money supply process 6 Central Bank’s Control on Money Supply 6 The relationship between price and Money Supply 7 Price Stability and other goals of Central Banks 9 Price Stability 9 Other Goals of Central Banks 10 References 15 Objectives of Central Banks Central banks are government bodies involved in the management of the money supply, the currency and the interest rates of the nations…
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The relationship between price and Money Supply
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Download file to see previous pages This is done by issuing sufficient monetary instruments when required. The Central banks also help the government in designing the currency of the country, which includes all the unique features. 2. It is involved in regulating and co-coordinating with the government and the stated economic policies of the country. 3. The interest rates are also controlled by the central banks to maintain price stability within the country. It also has to keep a track of the inflation in the market. The Central Banks of all the countries have an effective plan for managing the public debts. They do this through the sales and purchase of government papers such as bonds and securities. 4. The Central Bank is also known as a banker's bank. This means that the commercial banks of the countries are also regulated by the Central banks of the respective country. The Central bank not only regulates them but also provide adequate financial assistance in time of need. 5. The central bank needs to ensure the proper functioning of the financial systems within the county. They regulate the banking system within the country and are answerable to the world market (Downes & Vaez-Radeh, 1991). Balance Sheet Analysis The Balance Sheet of Central Banks has the list of all the liabilities and the assets that the Central Bank possesses. It is important to study the balance sheet of the Central banks in order to understand how they implement the monetary policy because the balance sheet reflects the sales, purchase records of the Central Bank and also states the holding. The Central Bank is the in charge for issuing the country's currency and it also posses the power to eliminate the power of the currency. In short, we can say that the balance sheet shows the true picture of the actions of the Central Bank. The balance sheet of a Central Bank focuses on three main components: bankers to commercial banks, Issuing the nations' currency and banker to the government of the country (Jadhav, 2006, p. 246). The Balance Sheet needs to be analyzed from two viewpoints such as: as an issuer of currency and duty to maintain the price stability and the growth of the economy through attaining the monetary policies of the countries' economy. It is important to know certain important perspectives to understand the balance sheets of the Central banks. Firstly, the central banks are fully government owned. There are very few exceptions, but in that case there are certain restrictions on the share-holding patterns. Secondly, Central banks are the only banker for the government of ever nation. Finally, the Central bank also has to take care of the public debt. It has to always see that the net foreign asset is higher compared to the currency, so as to see that the domestic demand of foreign currency is duly met The monetary base The two components of money supply are monetary base and money multiplier. Monetary base includes the reserves and the outstanding currency of the economy. It comes in the asset side, in the balance sheet, of the central bank. It links the central banks to the other measures of the money supply. So we can ...Download file to see next pagesRead More
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