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Besides, they also purchase and sell bonds.
Macesich (2000) argues further that money plays a vital role in the economic activities since it virtually makes economic transaction possible. When the supply of cash is higher in the economy, consumers tend to have more money. This in turn encourages spending. On the other hand firms or businesses or ventures respond by increasing either raw materials or production. Because business activities tend to be spread, the demand for labor as well as capital goods increases. Increase in expansion of money supply consequently results into increase in prices more so if the growth of output approaches the limited capacity. At this stage, consumers begin anticipating inflation. However, lenders begin aggravating for higher interest rates to balance the anticipated reduction in the purchasing power while offsetting the loans. The converse is true when money supply subsidizes or the growth rate declines. For instant, Federal Reserve policy plays a crucial role in determining money supply. It does so by influencing its deposits in the bank. They do this by mandating commercial banks to hold part of the deposits that they accept. These institutions comply by either holding cash in the vaults or holding deposits that they make at the Federal Reserve. The Federal Reserve in turn manipulates their reserve by lending cash to banks and changing the discount rate on loans. Therefore, when the supply of money in the economy is high, despite the interest rate target, the central banks tend to device mechanism that are aimed at limiting cash flow in the economy. When this is done, the demand for cash that is apparently at the bank reserves increases. This increase in the demand compels the central banks to stop holding money in the reserves.
Central banks encounter a challenge of policy enforcement in the domestic banking system
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The housing bubble was also affected which further caused employment problems all over the world. All these matters aforementioned lead to recession and debt issues. In 2007, it started off with a liquidity crisis. (Berlatsky, 2010) Causes of financial crisis In 2006, the real estate bubble that US had been facing with extraordinarily high valuations of properties eventually came down and burst.
Trade deficit in a country is an economic condition, which results when a country imports more goods than it exports. The deficit is equivalent to the goods imported less the value of the exported goods, and it is given in terms of the currency of the involved country. Measuring the trade deficits is difficult and it involves measuring investment flow for different accounts. These include the financial and the current accounts, which are totalled to get the balance of payments.
Similarly, modern people largely depend on banking services including but not limited to check settlement, money transfer, online purchases, and payment of bills and subscriptions. With the emergence of globalization, countries worldwide liberalized their cross border trade laws which in turn promoted the concept of foreign trade.
Thus, for the determination of the value of a bond for a period of time, the rate of interest is a useful metric that would help in determination of the present value and the future value of the bond. Interest rate is generally determined from the market rates which would be captured in the valuation of a long term debt instrument such as a bond.
The study also mentions the recent shut down and take-over of Lehman Brothers and also the problems faced by AIG to borrow money.
One of the most important responsibilities for the Fed is that of ensuring monetary stability in the economy, which can be achieved through a combination of stable prices of goods and services across the economy coupled with a low inflation level and level of confidence of the investors in the currency of the country.
serve, European Central Bank, Bank of England, Bank of Japan, Reserve Bank of India, etc use various interest rate measures like the lending rate, deposit rate and reserve ratios to control the money demand and supply of an economy. If the central bank targets growth of an
Although the central bank’s role in controlling inflation and ensuring that the economy runs smoothly is commendable, the problem occurs when it operates as the lender of last resort. Financial institutions ‘ability to easily access