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Central Banks & other International banks - Assignment Example

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Central Banks and other International Banks 1. Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates. The central bank is vital to every modern economy in as far as monetary and fiscal policy is concerned…
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Download file to see previous pages In some cases, the central government may place restrictions con how to hold and use foreign exchange or how to dispose local currency. 2. What did the central banks do to stabilize the financial systems in 2007–2009? In order to stop the financial crisis, central banks across the world followed plans that were almost parallel inaction. The eurozone, US and Britain central banks cut interest rates almost to zero, injected capital in the markets (through massive stimulus programs) and guaranteed bank lending (Allen, 2008). These actions were taken in a bid to restore investor confidence and liquidity. In some nations, the central governments have endeavored to coordinate debt issuance with an aim of avoiding the destabilization of their financial markets. 3. In an effort to stabilize the financial system how much money, in U.S. dollar equivalent and as a percentage of the country's GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009? The Central banks responses to the financial crisis were quick and dramatic. The US pumped close to one trillion USD in total in 2008 and 2009 in two massive stimulus packages. In the final quarter of 2008, the European Central Bank and the US Federal Reserve purchased about 2.5 trillion USD worth of government debt and private assets from banks (Spiegel, 2008). Today, the US has spent about 11 trillion USD to the financial crisis about 9.8 trillion USD going to troubled US corporate entities including JPMorgan Chase and General Motors. About 1.2 trillion USD has been set for use in the countries stimulus programs. Of the 9.8 trillion USD, about 6.4 trillion USD is set to be used in Federal Reserve Rescue Efforts. The Bank of China in 2008pledged to release 586 billion USD in the domestic market to stimulate the country’s economy (Morrison, 2009). 4. How well did each country's efforts work at stabilizing the economy? The central banks of most countries have worked in coordination with their counterparts elsewhere cutting short term interest rates. Even the People's Bank of China joined the major economies in cutting interest rates. The central bank interventions worked positively for all the countries in mitigating the effects of the financial crisis. In fact, the effects of the crisis have continued to dwindle over time. 5. What appears to be the major constraint that the central banks used to determine the limits of the monetary injections into the economy? The US assumed a most proactive role in tackling the financial crisis. The Federal Reserve has mainly applied interest rate changes to stop the financial crisis from having greater effects on the economy – more than any other central bank. The bank’s interest rate has been reduced from about 5.3% in September, 2007 to about 1.4% over the last couple of months (Senanayake, 2009). 6. Did the United States use the same or different criteria? Through this action, the bank has managed to shelve away worries related to high inflation rates. The US applied interest rate reduction, stimulus packages and a relaxed monetary policy like the other central banks albeit more proactively. By lowering interest rates, the supply of money in the market got to increase thereby reducing inflation and panic in the market. 7. To what extent to do you agree/disagree with the actions of ...Download file to see next pagesRead More
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