Development in banking and finance - Essay Example

With passage of time things turned more complex; bankruptcy of big financial institutions like Merrill Lynch, Morgan Stanley and Bank of America disturbed the sentiment of the market. Such state of affairs affected the global stock markets and soon almost all the developed nations were engulfed by economic recession (p.63-67) To support the economy, the government of different nations infused stimulus packages for injecting liquidity in the market. Government also provided bails to several corporate companies to save them from bankruptcy.

The increasing financial crisis was aggravated by a decline in demand; hence government had to enhance spending so as to raise the demand. To raise the demand and boost confidence among the investors, government reduced tax rate on several direct as well as indirect tax instruments so that the investors can have more money in their hand. To boost expenditure among the investors and to enhance supply of cash in the market, government reduced prime lending rate as low as possible. From the above given fact it appears that government of almost all the developed nations are following expansionary monitory and fiscal policy.

Through expansionary monitory policy governments were able to reduce the rate of interest to a great extent. Through open market operations the central bank enhanced total money circulating in the economy whereas the government enhanced the monitory supply through sovereign bond transactions. The governments of developed nation enhanced disbursement of cash through banking sector by reducing cash reserve ratio i.e. the cash which the banks need to maintain as deposit with central bank. Reserve banks gave loans to the financial instructions at lower rate so that they can disburse loans to the investors and supply of money increases.

Interest rate is the most commonly used monitory tool to