In the essay “Fiscal Tools of Central Banks,” the author examines fiscal tools such as interest rates in order to control the money supply in the economy. Monetary policies are widely used by many central banks to regulate the money supply…
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Since a low stable inflation is mandatory for an optimal economic growth, one of the main roles of the central bank is to control the growth of money by controlling inflation which is attained by using monetary policy tools. According to early classical theories of inflation pertaining mostly to the growth of money, an increase in the supply of money by government forces is primarily responsible for increased inflation levels. However, the growth of money is a necessary prerequisite for the growth of money but it is not adequate on its own (Mankiw & Reis, 2002). Other factors that should be considered include the velocity of money because, in the absence of money expenditure, no inflation can occur. A good example of the importance of the velocity of money impact on inflation is when people possess money but instead of spending it, they hide the money in their homes. In such scenarios, there will be no effect on the present inflation levels.
Inflation is recorded when suppliers of goods and services increase the prices of their products by responding to the effects of aggregate demand in the economy. “The increase in aggregate demand has the effect of increasing aggregate supply” (total supply of all the services and products in the economy) (Dullien, 2004). Therefore, an increase in inflation levels is as a result of an increase in the demand which is relative to supply. A cycle is created as a result because when people acquire money they proceed to spend the money on a service or product and the money is transferred to the supplier of the good/service and the supplier, in turn, spends it turn on some else and an endless cycle continues. In this case, the government creates money which is cycled throughout the population endlessly. ...Download file to see next pagesRead More
As the new roles of central banks changed into agencies of public policy, there were underlying objectives that were infrequently stated. In the context it is used, an individual can conclude that objective that underlie all functions for the interest of the economy, is consistent with economic policy of the government.
The central bank can be identified as an institution whose main task is to manage the currency of a country, its money supply as well as its interest rates. The central bank of any particular country is also responsible to look after the commercial banking system.
Central banks are also normally concerned with currency, collection, as they are the bank of the government. They control the credit structure, supervise commercial banks, deal with exchange funds and operate as a lender of previous alternative. 1. Discuss briefly the five objectives of central banks.
In the forex market, the bank may purchase foreign currency using domestic currency to keep inflation and deflation in check (Basu, 2009; Topnews, 2011). This helps in valuing or devaluing a particular currency in case of need. To increase the value of a currency, the central bank will buy the currency and hold huge quantities of it in its reserves thereby reducing its supply in the market.
This initiative was accomplished through an agreement by the US Federal Reserve, UK central banks, the Euro zone, Canada and other countries to ease the cost of financing. This was done by softening the existing swap arrangements, a deal, which saw the increase in the dollar in Asian stock markets.
LOLR is a crisis management strategy financed by the central bank’s money. One case that relates to central banks’ role as lender of last resort is in the manner that the recent financial crisis was dealt with by many nations. The recent financial crisis started in mid 2007 and ended in 2008.
As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money, that is, the interest rate. In May 1997 the Government gave the Bank independence to set monetary policy by deciding the level of interest rates to meet the Government's inflation target.
They also offer financial services to potential investors both from the local and foreign market. However, the banking sector among the Islamic states still remains to be underdeveloped and lags behind in