Money and Banking - Assignment Example

Money and Banking By + Question one: Monetary policy Why an increase in the demand for bank reserves lead to a rise in the monetary supply The bank reserves or the central bank reserves refer to the bank holdings of deposits in the accounts with their federal accounts. This means that the central bank should not use all its deposit or lack holdings within their accounts. It is always advisable that the central bank should not use its physical capital to a negative level. The liabilities and lending to customers should always be equal in order to avoid imbalance in the costs of operations. The issue of the rise in demand for bank reserves leads to an increase in the monetary supply due some various economic concepts. The monetary supply is for creating opportunities of heavy investments (Chambers, 2009). This will eventually generate abnormal profits that will make income flow without deficits. The central banks will not be at great risks because the demand for the reserved capital will be stable. The main aim of monetary supply by the central banks is to increase the income for the individuals who earn low income. The implementation is highly in relation to the concept of rural micro finance. This will create a system of economic growth and development thus sufficient flow of money or capital that makes the enterprises to operate with effective economic boundaries. The central bank reserves should create avenues that make the economic situations of a state to be more stable. The increase in the monetary supply lowers the chances of interfering with the economic statue of protecting the reserves from usage. Using the central bank reserves may make a country to run into great losses that may make the country to run into losses that are impossible to recover. The benefits of central bank lending to banks to prevent bank panics It is very clear that the central bank helps the other financial institutions to develop stability in business transactions. The central bank helps the banks to create a good customer relationship, as the customers will always acquire the quality products and services they need. The rediscount operation prevents panics in that the probability of running into losses is next to impossible. The costs Various costs are related to this issue of the central bank lending to banks in order to avoid inconveniences. They include the following: The cost of great loss of aggregate output due to international depression – this is because most of the financial institutions might be strongly waiting for support from the central bank yet the available capital is only the reserve that cannot be mishandled. Slow growth in economic growth and development – this is due to the increased dependency rate of banks to the central bank for capital instead of being creative and find potential sources of effective capital. The banks can engage in various public activities such as cleaning business centres such as markets in order to generate quick capital that establishes enforcement in the economic structure. The budgetary structure of the government greatly declines – when the central bank lends a lot of money to the banks, the possibility of retaining the reserve will be high. The government or authorities will not be able to borrow the reserves for the sake of protecting the banking regulations and eventually the government’s budget will need to go down in order to avoid bad debts (Chambers, 2009). The concept of exit strategy for the central banks from the non-convectional monetary policy may be both challenging and prevent the ability of the central bank to effectively and efficiently manage the economic growth and development in the future. This creates an idea of allocating some capital that can be used in such issues. Comparison of the use of open-market operations, central bank lending facilities and changes in reserve requirements to control the money supply Flexibility The open market operations are more flexible that the central bank lending. This is because the open market deals with customers manually to do with them business provided the terms and conditions are favourable and can change from one business to another thus flexibility (Shapiro, Solomon, White, and Steiner, 2008). The central bank is always not flexible as such because it deals with formal business thus highly classified. Reversibility The transactions in both concepts are reversible though the reversibility for the central bank takes a longer period due to formalities. Open market operations are highly reversible due to the presence of few legal formalities. The reversal concept is always common in situations where there are adjustments due to some mistakes. Effectiveness The two concepts are very effective once the protocol is followed to the latter. The idea of effectiveness brings the element of success in an organization. The success is due to effective work that flows from the coordination of top management to the supporting stuff. Therefore, there is a main driving force of communication and transmission of appropriate information within an organization. Speed of implementation The open market operations implements activities at a little bit higher speed because there are a few legal formalities to consider. Speed is important in the operation of an organization because another step in a business enterprise or transaction will only take place after one is done. The speed of implementation in the central bank takes a slightly lengthy period due to the various formalities (Shapiro, Solomon, White, and Steiner, 2008). There should be efficient and effective changes in the reserve requirements in order to control the capital supply. Question two: International finance and the exchange rate Contribution of a large balance of payments surplus contribute to the country’s inflation rate In the early 19th century, a great number of micro economists had come up with a clear view of micro economic changes that were in relation to the role of monetary factors. The overall theory of interest, prices and employment will consider very sensitive concepts in the economic fields. The growth in monetary supply was a major of comprehensive economic activity and more specifically inflation. High inflation and interest rate had a major impact in the economics profession and this supports the principle that states that inflation is always and everywhere in a monetary concept (Ritter and Silber, 2014). The ultimate source of inflation was generally an explanatory monetary policy. Specifically, a sensitive and a major imprint of the line of thoughts claimed that the central bankers came to recognize that keeping inflation under control was the best priority. If there are large balances in a state, the country will always depend on donor foods and the international countries will always restrict the poor country from any importations due to bad debts. This will eventually trigger the element of inflation; this is done in order to maximize profits. In a pure exchange rate system, the foreign exchange market has no direct effects on the money supply. This principle is very true because there are various economic concepts that do not work outside the borders of a state or country. The main element in this situation is the gross domestic product. Therefore, the exchange rate system plays a greater role in the gross domestic product while the foreign exchange is out of this issue (Prather, 2009). This is because the GDP do not consider the issue of foreign expertise who want to include their efforts into the economic status of other states. In the pure exchange rate system, the foreign exchange market has no direct effects on the money supply due to the lack of inclusion of any economic factor or principle from a foreign country. This majorly helps a country from the issue of high dependency from other foreign countries. The pure exchange rate system creates credibility of competence of the state that uses that system. Main benefits and costs of monetary union The main benefits a monetary union derive from the elimination of transactions costs of the exchanging currencies and the removal of the exchange rates instability. The adoption of a single currency eliminates the needs of the firms to maintain staff to look after exchange rate within the sector. The main costs of the monetary union are those that are vital to the inability of the administrations of the personal countries to use state specific monetary regulations and to use the exchange rate as a tool of microeconomic adjustment. The profit and losses arising from the establishment of monetary union are dependent on the structural microeconomics. These are very important principles in business transactions thus profit maximization. The main criteria for the optimality of a currency area In the concept of economics, an optimum currency area is the geographical region whereby an enterprise would maximize economic efficiency to make the entire sector use a single currency (Prather, 2009). It illustrates the relevant characteristics for the currencies to create a single currency. An optimal currency is always bigger than a country. This theory is always used to evaluate whether a region may merge up to become a currency union and it is always the final stages in economic integration. The criteria for a successful currency union are as follows: Effective labour mobility across the region - Involves lack of cultural barriers thus one can move freely. The main element here is the physical ability to move. Acceptance of the capital mobility, wages and price flexibility in the entire region – this triggers the market principles of supply and demand to automatically distribute money and goods to their places of destination. Creating an automatic system of finance that will immediately transfer finance to regions that are in great need. Such areas include areas that experience drought or political instability (Ritter and Silber, 2014). This cash will assist them to deal with the problems appropriately. The different countries that participate in this operation should have similar business cycles. This creates a situation that a problem is easily solved for the sake of economic growth and development. References Chambers, R. (2009). Accounting, finance and management. Sydney: Butterworths. Chandler, L. (2004). The economics of money and banking. New York: Harper & Row. Fields, E. (2012). The essentials of finance and accounting for nonfinancial managers. New York: AMACOM. Hammonds, H. (2006). Banking. South Yarra, Victoria: Macmillan Education Australia Pty. Ltd. Hines, T. (2009). Accounting & finance. Checkmate Gold. Holdsworth, J. (2007). Money and banking. New York: D. Appleton-Century Co. Mishkin, F. (2008). The economics of money, banking, and financial markets. Reading, Mass.: Addison-Wesley. Prather, C. (2009). Money and banking. Homewood, Ill.: R.D. Irwin. Ritter, L. and Silber, W. (2014). Principles of money, banking, and financial markets. New York: Basic Books. Shapiro, E., Solomon, E., White, W. and Steiner, W. (2008). Money and banking. New York: Holt, Rinehart and Winston. Read More