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Money and Banking Assignment - Essay Example

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Therefore, commercial banks are set to benefit more by lending its reserves to individuals and firms than depositing them in the central bank. In the process,…
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Money and Banking Assignment
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"Money and Banking Assignment"

Download file to see previous pages This is due to the fact that banks are involved in risky investments without fear or concern about the repercussions nations may face in the advent of losses.
Risky investments are aggravated by the fact that banks will be bailed out in case of losses by central banks. This can facilitate organized losses and economic failures by rogue individuals with the aim of channelling all the banks’ financial assets into their possession and then request for central banks’ intervention. This burden, through the central banks is channelled back to taxpayers. The reverse is also true. If financial institutions were unable to solicit funds from central banks, then chances of them indulging in risky investments would be very minimal. (Hughkitt13 2012)
III. Compare the use of open-market-operations, central bank lending facilities (rediscounting), and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
The best monetary policy should implement the following criteria to be considered effective: flexibility, reversibility, effectiveness and higher speed of implementation. On the issue of flexibility, the best method to use would be to change the reserve requirements. Depending on prevailing market conditions, reserve requirements can be easily adjusted to either reduce the money supply or increase it. The process is done on a daily basis, making it the most effective and also the fastest method to implement.
Central bank rediscounting is a faster method to implement than open-market-operations since they can be obtained easily under short notice. They are also more flexible owing to the fact that they require fewer channels to get them. OMOs are more rigid and are only implemented once financial dignitaries meet and agree on the way forward. However, when we consider ...Download file to see next pagesRead More
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